Mutual funds are an excellent way to buy Ginnie Maes, which are high-yielding mortgage securities fully backed by the federal government. Securities issued by the Government National Mortgage Assn. (GNMA), a federal agency, are guaranteed, so there’s no risk of default. Yet, Ginnie Maes usually yield anywhere from 0.5% to 2% more than Treasury bonds.
If Ginnie Maes are just as safe as Treasuries, why the extra yield? Because they’re more complicated. The “pass-through certificate” in which you invest is really part of a pool of home mortgages. Ginnie Mae investors step into the shoes of mortgage lenders. Thus, you get a monthly payment that’s part interest and part repayment of principal. What’s more, home mortgages may be prepaid if a house is sold or refinanced. When that happens, investors get a substantial but unexpected return of principal.
For that reason, stay away from Ginnie Maes sold directly. Instead, buy Ginnie Maes through a Ginnie Mae mutual fund, which will automatically reinvest your returned principal in more Ginnie Maes.
No-load Ginnie Mae funds are offered by most no-load fund families, including Benham, Fidelity, T. Rowe Price, Scudder and Vanguard.
Engage with us today to learn more about Ginnie Maes and how they may benefit you!
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