Thursday, December 8, 2011

Risk & Reward

It varies from one fund to another but generally speaking the cost of operating a Mortgage Investment Corporation, including setting aside a reasonable reserve, is about 3%. Therefore when a MIC delivers a 5% net dividend to you, the MIC must lend its money out on mortgages at 8% interest.

This is possible and reasonable for a private lender such as Fisgard. However, a MIC that offers a 9% net dividend to its shareholders must be lending its money at about 12%, which is quite high.

Who would pay 12% on his or her mortgage? Under what circumstances would you pay 12% interest to borrow money on the basis of mortgage security? It’s a question that needs to be asked, as you could be stretching your risk a bit too far by reaching for such a high return. In today’s real estate market borrowers would have a hard time paying 12% except under unusual circumstances, and would run the risk of default.

Our policy is safety first, so we avoid the level of risk associated with high interest rates. Fisgard investors are satisfied with a more modest return and better security.

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