Developing an Understanding of the First Mortgage

by David Jenyns on March 7, 2008

The vast majority of US home owners have a first mortgage on their homes and are only too familiar with the fact that a first 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 mortgages—commercial banks, savings banks, insurance companies, building and loan associations, pension funds, union funds and trust funds. 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. * 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.

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