Mortgage Investment Strategies To Boost College Funds

Investing in mortgage funds can be a strategic move for those looking to diversify their portfolio and generate a stable income stream. These funds, similar to mutual funds, pool capital from investors to finance real estate projects, with returns primarily derived from interest on loans. While investing in mortgage funds can enhance portfolio diversification and provide steady returns, it's important to carefully evaluate the fund's strategy, past performance, fees, and liquidity options. Additionally, the success of a mortgage fund relies heavily on the expertise of its fund manager, and investors need to be aware of risks such as market downturns, interest rate fluctuations, and credit risks.

The pros and cons of refinancing a mortgage to pay for college

Refinancing a mortgage can be a good way to pay for college, but it depends on your individual situation and goals. Here are some pros and cons to consider:

Pros:

• Lower monthly payments: Refinancing for another 30-year term can lower your monthly payments, freeing up money in your budget for other financial goals, like saving for college.
• Lower interest rate: If interest rates fall after you take out your loan, refinancing can allow you to take advantage of a lower rate. This could save you thousands of dollars, depending on the length of your loan and the difference between your current rate and the new rate.
• Switch to a fixed rate: If your original loan is an adjustable-rate mortgage (ARM) and the fixed term is ending, refinancing to a fixed-rate mortgage can protect you from rising interest rates in the future. A fixed-rate loan also makes budgeting easier, as your monthly payments will stay the same.
• Cash-out refinance: You may be able to access cash through a cash-out refinance, which you can then use for college fees. This option generally has a lower interest rate than credit cards or personal loans.

Cons:

• Closing costs: Refinancing comes with closing costs, just like a regular mortgage. These can amount to thousands of dollars and may include appraisal fees, credit report fees, title services, lender origination/administration fees, survey fees, underwriting fees, and attorney costs.
• Increased debt: If you plan to cash out your equity through refinancing, you need to be clear about how you'll use the money. Be sure to weigh the costs versus the rewards, as you will have to wait for your home value to increase before you can access this cash again.
• Credit score impact: Refinancing your mortgage could negatively impact your credit score, as lenders will perform a hard inquiry to evaluate your creditworthiness.
• More total interest: If you refinance for another 30-year term, you will pay more in total interest over the life of the loan.
• Reduced home equity: A cash-out refinance will reduce the equity in your home, as you are using the equity as cash.

The risks of investing in mortgage funds

Investing in mortgage funds can be a great way to diversify your portfolio and benefit from the expertise of seasoned real estate professionals. However, as with any investment, there are risks involved that you should carefully consider before making any decisions. Here are some key risks associated with investing in mortgage funds:

Giving Up Control

One of the biggest risks is that investors surrender control to the fund manager. The success of the investment heavily relies on the fund manager's expertise and decisions. Therefore, it is crucial to select a fund manager with the right qualifications and a solid track record in real estate, finance, and risk management.

Default Risk

The primary risk when investing in mortgage funds is the possibility of borrowers defaulting on their loans. High default rates can negatively impact the fund's performance and lead to decreased returns for investors. Changes in influential factors, such as interest rates, can trigger such defaults and affect the fund's overall performance.

Market and Interest Rate Risk

Mortgage fund investments are linked to the volatile real estate market and are susceptible to market downturns and interest rate fluctuations. A decline in the market or an increase in interest rates can impact borrowers' ability to repay their loans, which, in turn, affects the returns investors receive from mortgage funds.

Anticipated Returns May Not be Met

There is no guarantee that the anticipated rate of return will be achieved. Investors should understand that any target returns provided are merely goals and not assurances of actual performance. Additionally, investors should be aware of prepayment risks, which can further impact the returns.

Liquidity Risk

Mortgage fund investments are typically considered longer-term investments, and instant redemption of investor funds is not always possible. While well-managed funds retain some cash to meet liquidity requirements and allow redemptions at regular intervals, investors should be aware that most funds have specific restrictions on how and when investor capital can be returned.

Loan-to-Value Ratio (LVR) Risk

The LVR is the percentage of the loan value against the property value. A higher LVR indicates a riskier loan. In the event of a borrower defaulting, a higher LVR increases the risk of not being able to recoup the full loan amount, especially if the property value decreases.

Lack of Diversification

If a mortgage fund lacks diversification in its loan portfolio, it may face higher risks. Ideally, a fund should invest in a large number of loans so that if one borrower defaults, the rest of the loans can continue to provide consistent returns. Diversification in terms of the location of the security properties is also important to mitigate the risk of adverse effects from plummeting property prices in a specific area.

Fund Management and Regulatory Compliance

The performance of a mortgage fund is closely tied to how it is managed. Investors should carefully evaluate the fund manager's experience, performance, and commitment. It is also crucial to ensure that the fund adheres to regulatory standards and practices transparent reporting.

High Fund Expenses and Fees

Some mortgage funds may have high expenses and fees that eat into the returns. It is important to review and assess whether the fund's performance and strategy justify these costs.

The benefits of investing in mortgage funds

Investing in mortgage funds is an attractive option for investors looking to diversify their portfolios and generate passive income. Here are some key benefits of investing in mortgage funds:

• Passive Income: Investing in mortgage funds allows you to generate passive income without the hard work and time commitment of flipping homes or managing rental properties. Your investment is managed by professionals, and you receive regular interest payments from the borrowers.
• Diversification: Mortgage funds typically invest in a range of loans and properties, reducing the risk associated with investing in a single property. This diversification helps to mitigate the impact of borrower defaults, as your investment is spread across multiple loans, property types, and geographical locations.
• Attractive Returns: Mortgage funds often provide attractive investment returns, higher than typical bank interest rates. The income earned is reliable and consistent, offering a steady cash flow, especially when compared to more volatile direct real estate investments.
• Professional Management: Mortgage funds are managed by seasoned real estate professionals who are experts in selecting quality loans, minimizing risk, and optimizing returns. Their expertise and rigorous underwriting practices give investors peace of mind that their investments are in capable hands.
• Flexibility: With mortgage funds, you have the flexibility to choose the amount and timing of your investment. You can decide how much to invest and for how long, although it's important to note that early withdrawal may come with certain restrictions and penalties.
• Risk Mitigation: Mortgage funds, particularly those investing in hard money loans, are structured to mitigate risk. Even if some borrowers default, investors still receive returns from the other performing loans in the portfolio. Additionally, loans are secured by the property, so in the event of a default, the fund can foreclose on the property to recover the principal and protect investors' capital.

How to invest as a college student

Investing is a great way to build long-term wealth, and the earlier you start, the more time your money has to grow. College is an ideal time to start investing because you will never have a longer time horizon until retirement than when you graduate high school.

Where to start?

Before you begin investing, it's important to set up a budget. Figure out how much money you make (after taxes), and how much money you have left after paying for basic expenses such as rent, utilities, phone bills, food, etc. From what's left, set aside a portion for savings.

There are several investment options for college students, including stocks, bonds, mutual funds, exchange-traded funds (ETFs), and cryptocurrencies. You can also explore retirement options like Individual Retirement Accounts (IRAs).

This depends on your budget and financial goals. You can start with a small amount – many brokerages do not require a minimum investment amount, and you can invest with as little as $5.

Where to invest?

You can open an investment account through a bank, broker, or investment company. There are also several online options, including robo-advisors and micro-investing apps, which are great for students with busy schedules.

Tips:

• Diversify your investments to minimise risk.
• Do your research and understand the risks involved.
• Be consistent and invest regularly.
• Monitor your portfolio periodically, but don't get too caught up in daily fluctuations.
• Consult a financial advisor if needed.

The importance of investing for retirement while paying off a mortgage

Paying off your mortgage vs. investing for retirement: which is the priority?

It can be a tricky decision to know whether to focus on paying off your mortgage or investing for retirement. The answer is that both are important and you should aim to do both simultaneously. However, if you are unable to do this, most financial advisors recommend prioritising investing for retirement, particularly if you are younger.

The benefits of paying off your mortgage

Paying off your mortgage has several advantages. Firstly, it will save you money on interest, which could amount to thousands of dollars. Secondly, once your mortgage is paid off, you will have more money available to invest, which can quickly boost your overall savings. Additionally, you will have the peace of mind of knowing that you fully own your home. Paying off your mortgage can also give you access to more borrowing options, such as a low-interest home equity line of credit.

The benefits of investing for retirement

Investing for retirement has the benefit of compound interest, which means that the interest will earn interest over time, helping your money grow faster. The earlier you start, the more time your money has to grow. Investing for retirement also provides better liquidity than investing in property; it is much easier to turn your investments into cash than to sell your home if you need access to money quickly.

The downsides

The main downside of paying off your mortgage is that you will miss out on investment opportunities, which could make you considerably better off. Additionally, if the housing market falls, the value of your main asset could decrease significantly. Meanwhile, a disadvantage of investing for retirement is that you will have a large debt for longer, and it can feel precarious not to fully own your home.

So, which should you prioritise?

The answer depends on your personal circumstances, including your age, income, investment goals, risk tolerance, and mortgage interest rate. It is important to seek advice from a financial advisor when making this decision, to ensure that it fits within the framework of your overall financial plan.

How to balance both

Even if you decide to prioritise investing for retirement, you can still make small additional contributions towards paying off your mortgage. This is especially attractive in the early phases of a mortgage when small contributions can reduce the overall interest you pay.

Don't forget the tax considerations

Mortgage interest is tax-deductible if you itemise deductions on your income tax return. Therefore, keeping your mortgage could help to reduce the amount you owe in taxes. However, the Tax Cuts and Jobs Act of 2017 reduced the deductibility of some types of mortgage and home equity debt. It is important to consult a tax advisor to understand how this may affect your decision.

Frequently asked questions