When you think about a mortgage from a lender's perspective, it's a pretty decent investment, especially if it's a stable loan made on a property with equity to a borrower that can afford it. After all, when you make a mortgage, you get monthly payments of interest and principal that can last for decades. It sounds like a perfect investment to hold in an Individual Retirement Account. While it is possible to hold an actual mortgage in an IRA, it requires some extra work and expense. You can, however, hold mortgage stocks and bonds in most traditional IRAs.
A real estate investment trust is like a mutual fund, but instead of being made up of stocks, bonds or commodities, it's made up of real estate investments. While REITs have traditionally been ways for you to buy into buildings, mortgage REITs buy portfolios of mortgages and pay the returns to you. They're a little more complicated than they seem, though, as many inflate their returns by borrowing low-interest-rate money on the short-term market to buy long-term mortgages that have higher interest rates.
If your investing strategy includes buying bonds, you can purchase mortgage bonds in your IRA. A mortgage bond is similar to any other bond, except that instead of being backed by a company's assets or a government's promise to pay, it's backed by the individual homes of the people whose mortgages are pooled into the bond. Mortgage bonds also carry the risk that you could get paid off early if everyone pays off their mortgage before the maturity date.
To make your own mortgages directly to individual borrowers, you will need to set up a self-directed IRA account. Self-directed IRAs give you more latitude as to how you can invest the money in your IRA, letting you go beyond stocks, bonds and certificates of deposit. When you set up a self-directed IRA, you will have to pay account maintenance fees to the third-party custodian. The custodian holds your money and invests it when and where you tell them to -- in other words, at your discretion.
Holding Your Own Mortgage
If you choose to set up a self-directed IRA and invest in mortgages, you can't hold your own mortgage note in your IRA. While this might seem like a great idea because you'd be paying interest to yourself and building your wealth instead of your lender's, the IRS strictly prohibits what they call self-dealing. The money in your IRA has to be for the benefit of the IRA, not for you or for your family (the "self" in self-dealing). If your IRA holds your mortgage, you're benefiting from it personally, as you get to live in the house.
- Photos.com/Photos.com/Getty Images
- The Difference Between GNMA & FNMA
- Who Buys Mortgages?
- How to Calculate the Gain on the Sale of a Bond
- Alternative to a Certificate of Deposit
- Why Is an Annuity Put Inside an IRA?
- What Does It Mean if Freddie Mac Owns My Mortgage?
- Moving Money From H-Bonds to Annuity Tax Free
- What Are the Differences Between a Mortgage Bond & a Debenture Bond?