Investment products often involve many financial terminologies that could easily confuse and mislead any new investor. Mortgage note investments are no different.
So today, we thought of talking about performing vs. non-performing notes, the distinction of which is essential for you to learn if you’re new to mortgage notes.
A note is considered performing when a borrower is meeting repayment obligations. Banks could sell such notes to reduce their lending portfolio and minimize default risks.
When a borrower has failed to meet scheduled repayments, those notes are termed non-performing. Naturally, they carry a higher risk than a performing note.
Then why do some investors choose non-performing mortgage notes? It’s because they are usually available at a steep discount. As a result, investors stand to gain a higher return on their investment. If the borrower defaults, you might also make a substantial capital gain by going into foreclosure and selling the property.
Deciding between performing vs. non-performing notes, however, demands careful deliberation. It’s essential to consider relevant risks and, of course, your risk appetite.
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