Mortgage Due Dates

A mortgage is a debt. Its distinguishing feature from an ordinary debt is that a building is pledged to secure the mortgage debt. Most mortgages provide for regular payments to be made monthly or quarterly. Part of such payments cover interest on the indebtedness. The remainder of the regular payments ordinarily are payments on the indebtedness itself.

Some mortgages are "self-liquidating." Payments are so arranged that after a number of years of regular payments, the mortgage debt is completely liquidated. Such self-liquidating mortgages are ideal. You do not have to worry about renewal or refinancing at higher interest rates. Unfortnately, they are the exception today. Most mortgage lenders on investment properties do not want to have their funds tied up for the number of years it takes to have the mortgage liquidated.
As a rule a mortgage loan is made for a definite number of years, as agreed upon at the time the loan is made. The balance which remains due at the end of that period agreed upon must then be paid back.

If the owner of the building fails to make an installment payment when due or fails to pay back the balance left on the due date, the lender may foreclose and have the property sold. Usually a forced sale of a building brings a low price, sometimes just enough to pay the mortgage debt and expenses. The owners may lose everything they invested. We assume that the syndicator made sure that the projected income o£ the building will suffice to meet the regular monthly or quarterly payments due on the mortgage. Just the same, you must examine the terms of the mortgage or mortgages. They appear in the brochure.

You will want to know when the mortgages are due, whether the remaining balance will have to be paid in full in one payment. Mortgages which are due in a few years are usually less desirable than long term financing. A short term mortgage may make it necessary to find a new mortgage at a time when it is difficult to borrow money and when interest rates are high. If the mortgage is due in 20 or 25 years, the syndicator will have ample time to choose a good moment to obtain a new mortgage on favorable terms

Mortgage Interest Rates

It is not enough to know that a certain sum has to be paid each year on the mortgage. The rate of interest which has to be paid on the mortgage is important. The following example will show you that two deals with equal yearly payments are by no means identical. Two syndicates buy buildings subject to a $1,000,000 mortgage. Every year each syndicate has to make constant payments of $80,000 on the mortgage. In one case the interest rate is 6%. In the first year $60,000 will represent interest on the mortgage indebtedness. $20,000 will be repayment on the mortgage. At the end of the year, the syndicate will owe $980,000 on the mortgage, since $20,000 was paid back.

The rate of interest on the mortgage on the building bought by the second syndicate is only 4%. It makes the same yearly payments of $80,000. However, only $40,000 will be required for payment of interest. Therefore, the remaining $40,000 of the yearly payment will reduce the mortgage indebtedness by an equal amount. At the end of the first year, the second syndicate will owe only $960,000 on its mortgage. It paid the same yearly amount, but reduced its indebtedness by twice the amount the first syndicate did. The difference amounted to $20,000 in a single year. Real estate ownership is a long-term proposition. Over the years lower interest rates mean huge savings.

Next: Combination of Short Term Mortgage and Low Interest Rate May Be Dangerous