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What Is a Collateralized Mortgage?

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  • Written By: C. Daw
  • Edited By: O. Wallace
  • Last Modified Date: 04 December 2016
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A collateralized mortgage is, in the simplest of words, a type of loan that involves using real estate to secure funds. The exact sum is something which the borrower and the lender agree upon before the contract between the two is signed. When conducting the deal, there are exact rules that are set, and it may vary between companies and locations, so there are no set perimeters that are followed with a collateralized mortgage. These rules define what kind of mortgage will be included in the collateralized mortgage obligation or CMO, as well as how much the principle and interest will be, and all of the other specific points that have been agreed upon by both parties involved.

Generally speaking, a collateralized mortgage consists of a piece of real estate, which is assessed to be of a value that is to cover the promissory notes. The latter determines the required amount of interest and the schedule defining how and when it should be paid. Big shopping stores and malls, as well as office buildings, are examples of real estate that may be financed with a mortgage when it comes to investment bonds. This type of deal is most commonly engaged by corporations such as banks and insurance companies that have the funds to lend, and the knowledge to collect if the entity being given the money falls behind on payments required.

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This type of credit is the one used in the future by the borrower. Contrary to the second mortgage loan, this deal does not involve giving someone the right to confiscate the property if they are to find themselves in financial debt. Moreover, the borrower does not have to spend the entire sum of money he or she gets from a collateralized mortgage. In business terms, this deal is a kind of customary mortgage. A collateralized mortgage is most regularly used in cases of reconstructing, or some kind of investment. All the information about one’s collateralized mortgage is always kept in public records.

To sum up, a collateralized mortgage obligation is a mortgage-backed type of investment with a fixed maturity. In addition, however, it must be known that maturity classes are known as tranches and they are determined by the type of return. A negative aspect of a collateralized mortgage obligation is that its interest rates are low, yet compensate for the reduction of pre-payment risk and the pre-scheduled payments.

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