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Precious metals investment terms A to Z

Mortgage

A type of a loan secured by real estate. A mortgage deal involves at least two sides – the borrower (typically a home buyer) and the lender (usually a financial institution). The lender provides the borrower with financial means necessary to buy a specific property. The borrower agrees to pay interest on the loan and uses the property as collateral. The deal might encompass various intermediaries between the lender and the borrower.

Eric asks:

Eric, Jill and John are in Eric’s car on their way to their mutual friend’s birthday party. Eric admires the houses in the neighborhood.

Eric, the Beginner

Eric, the Beginner

This one is really great!
Prof. Jill, the Investor

Prof. Jill, the Investor

You act like a little kid…
Eric, the Beginner

Eric, the Beginner

Maybe, but you can’t tell me I’m not right. I wonder… This is a nice neighborhood and all the houses seem classy. It has to be extremely expensive to buy something here.
Read the whole discussion

A little bit more on mortgages

Mortgages vary in interest rate, payment amount and frequency, the length of the period during which the mortgage will be paid off and the penalties for early repayment. They may also vary as to the amount of money lent as percentage of the value of the property. Specific types of mortgages may allow borrowing more money than the collateral property is worth. Apart from that, mortgages can be divided into two groups by the type of the interest arrangement:

  • Fixed rate mortgages
  • Floating rate mortgages (other names: variable-rate mortgages, adjustable-rate mortgages)

Fixed rate mortgages are mortgages in which the interest rate remains fixed for the entire period of the agreement. This means that payments should not change significantly over time – they can change only due to changes in the costs of items other than interest (e.g. insurance fees).

In a floating rate mortgage the interest rate might change (and it usually does) over time. In most cases it tracks economic variables, for instance the interest rates of the central bank. This means that the payments may change over time and the borrower cannot be sure how much money they will have to repay each month in the future. This is the most common type of mortgages.

Another distinction can be made between mortgages repayable in the borrower’s national currency and in foreign currencies. In some countries interest rates on mortgages are lower than in other. This enables borrowers to access cheaper debt. However, foreign currency mortgages have drawbacks. If the exchange rate changes in an unfavorable direction, one might end up with a mortgage that is more costly than a mortgage repayable in the local currency.

Foreclosure

If the borrower doesn’t repay the mortgage, or repays it with significant delays, the borrower could lose the right to repay the mortgage and therefore the right to the property. In such a case the property may be auctioned in order to cover the outstanding balance of the mortgage (the amount of money the borrower owes to the lender in that particular moment). If the auction fails to gather the amount of capital needed to cover the outstanding balance, the borrower has to or doesn’t have to repay the remaining difference, depending on the jurisdiction. Mortgages and gold

Some investors might be inclined to purchase gold or silver using debt (possibly from their mortgage). We must admit that the idea is tempting, but we generally do not recommend it. While it does seem to make sense, from a purely logical point of view, one should also take other factors into consideration, one of them emotions.

By borrowing money and investing it in an asset that does not provide you income, i.e. dividend, you also generate a negative revenue stream. In other words, you need to make payments on a monthly basis, which is not a big deal as long as the price of gold goes up, but which may become a big problem during consolidations. The point is that when you have to pay for the ability to hold a certain amount of gold or silver, you would like metals to go to the moon instantly. Naturally, all owners of precious metals would like to see the price of metals explode but with leveraged positions (and buying gold on margin / for borrowed money, means increasing the leverage), the pressure is much greater.

During consolidations, when one needs to be patient. It is easy to get frustrated when prices don’t go in the direction that you want them to go; however, if you need to pay a loan while at the same time watching your holdings go lower in value, you are much more likely to close your position just to stop losing money. We’ve put losing in italic font because consolidations are a temporary phenomenon that occur in every bull market. However, with the big pressure involved in buying anything on margin, it is very easy to lose one’s focus, panic and close one’s positions too early, possibly at a loss.

Therefore, taking the realistic approach toward investing, we cannot recommend purchasing gold and silver with borrowed money for most investors. Yes, it might prove worthwhile for extremely disciplined and risk-loving Investors, but we believe that for most people, this approach is dangerous. Of course, the final choice is always up to you. If you decide to proceed with purchasing gold and silver with borrowed money, be sure to take the abovementioned factors into account.

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