While the theory as to exactly what a mortgage is varies among states in the Union, a mortgage is for all practical purposes a promise on the part of a property owner to pay with interest a certain total sum in periodic payments over a given number of years to a person or entity that lent him this sum of money. If the payer (mortgagor) does not meet the payments to the one who lent the money (mortgagee) the mortgagee can have the property taken away from the mortgagor, sell it and pay himself what he is owed.
It is hardly necessary to belabor the point as to exactly what the legal definition of a mortgage is. The vast majority of home owners in the United States have a mortgage on their homes and are only too familiar with the fact that a mortgage is what they owe on the home and that if they do not meet their payments they will lose their homes.
The leading and most conservative financial institutions in the country invest in mortgagescommercial banks, savings banks, insurance companies, building and loan associations, pension funds, union funds and trust funds. There is a serious question as to whether we could have such a thing as life insurance as we know it in the United States if the insurance companies were not able to place their funds in mortgages which provide income on which to operate these companies. If mortgages were suddenly wiped out overnight so would building and loan associations, in all probability, since their major assets would disappear.
The safest and most conservative kind of mortgage for an individual investor to buy is a first mortgage on a dwelling which mortgage is insured by the Federal Housing Administration (FHA) or the Veterans' Administration. If the homeowner defaults on his payments, the government pays off. There is thus practically no risk in this type investment and the purchaser of such a mortgage generally does not need to examine the terms of the mortgage in detail, the financial soundness of the debtor or the value of the property.*
* It should be pointed out, however, that the FHA does not pay off in cash but in FHA debentures, which bear an interest rate about 1 percent below the mortgage rate and mature in 20 years. There are foreclosures on about M of percent of all FHA insured mortgages.
First mortgages, which are insured by the government, generally carry a rate of 5.25 percent to 5.75 percent. This is the return you receive on your money. Actually the rate may even be 6 percent, but the mortgage firm often does the collecting and for this service may charge as high as one-half of 1 percent per annum. This is not money thrown away on the part of the investor. The receipt of payments by the investor is never, and can never be an automatic procedure. It is well to fix this fact clearly in mind at this point in the study of securing a return on your money and never forget it.
If you find yourself in the position to become a mortgager, it is absolutely essential to get all aspects of the contract in writing and ensure that they are legally binding. To avoid losing out on your investment -- the amount you loaned plus interest -- you must have legal documents drawn up and be present when the mortgagee signs them. This is the only way to protect yourself against fraud, which is all-important when it comes to loaning out assets.