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What Should I Know Before Investing in a CMO (Collateralized Mortgage Obligation)?

A collateralized mortgage obligation, also called a CMO, is not for all investors but it can be the right choice for some. Mortgage backed securities have become more popular with many investors, and CMOs are one type of these investments. Collateralized mortgage obligation investors are grouped into three separate and different classes, usually called A, B, and C. The class you are in will determine how you receive the principal payments. All of the classes and members will receive payments from the interest on the CMO until the principal debt is completely paid off. The maturity rate of the security will depend on your class designation as well. Usually A class investors will receive the full principal payments first, followed by class B, and finally class C.

If you are considering investing in a collateralized mortgage obligation or loan securitization option, you need to do all of the research necessary to make sure you understand this market. Prepayment risks should also be considered, and the class of your will determine the specific risks involved. Class A investors will usually have the biggest risk that the obligation will be paid off early, resulting in less interest and lower returns on your investments. Class C investors usually have the lowest risk of this happening, because this group is the last to receive principal payments. Collateralized mortgage obligation investments can be ideal for many investors, but that does not necessarily mean that they are right for your investment goals and needs. Each CMO also carries specific risks and possible returns, and these need to be evaluated on an individual basis by each investor.

The information supplied in this article is not to be considered as medical advice and is for educational purposes only.