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As in any investment an important issue for investors is how do you preserve capital and enjoy good returns without a lot of risk. Mortgages in stable real estate markets provide this opportunity by relying on equity (the portion of a property that is paid for) as security.
The following is an example of the costs faced in a worst case scenario foreclosure, on a $200,000 residence in Calgary with a $50,000 2nd Mortgage Investment at 18% and 1st Mortgage of $100,000 at 7.5% (Equity available as security $50,000). We’ve allowed 12 months to foreclose and sell the property to pay off the mortgages.
| Appraised Value of Property |
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$200,000 |
| 1st Mortgage Balance |
|
$100,000 |
| 1st Mortgage Arrears (12 payments of $731.55) |
|
$8,778 |
| 2nd Mortgage Balance |
|
$50,000 |
| 2nd Mortgage Arrears (12 payments of $733.19) |
|
$8,798 |
| Legal Costs (Foreclosure and Sale) |
|
~$5,000 |
| Realtor Costs (Commissions) |
|
$10,700 |
| Property Taxes |
|
$2,300 |
| Balance (Equity Remaining after costs) |
|
$14,242 |
The equity remaining allows for some market adjustment for resale and serves as a source of contingency funds if additional costs, such as utilities may come in to play. It is rare that a foreclosure runs the full distance as most borrowers want to protect their equity and either refinance or sell the property to ensure that they are the recipients of the remaining equity.
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