Benefits and Risks of Ginnie Mae Bonds

Ginnie Mae bonds are a type of government agency bond that allows individual investors to get involved in the housing market. Ginnie Mae is a government agency that guarantees residential mortgages. The purpose of Ginnie Mae is to promote the mortgage industry and make it more affordable for individuals to find housing. Ginnie Mae bonds are mortgage backed securities. These bonds pay a regular amount of interest to the investor. This type of bond provides advantages and disadvantages. Here are some of the benefits and risks of Ginnie Mae Bonds.

Benefits

One of the best benefits of Ginnie Mae bonds is that they are relatively safe. You are investing in something that is backed by real estate and the federal government. There is a guarantee on these mortgage-backed securities because they are tied to a federal government agency. Even if a house goes into foreclosure, the lender still has the ability to take the house and sell it. This means that it is a much safer type of investment than many other bond options.

Another benefit of investing in these types of bonds is that they tend to pay out a fair amount of interest. You will essentially be able to get whatever interest rate is available in the mortgage market. This can provide you with good cash flow on a regular basis. Individuals who want to set up a passive source of income for themselves could benefit by investing in these bonds.

When investing in Ginnie Mae bonds, you will also have the opportunity to trade them in the secondary market. These bonds do not work like savings bonds, in which case they are attached to only one individual for life. If you want to get out of owning them, you can simply sell them to someone else.

Risks

One of the problems with this type of investment is that it requires a large initial investment. In order to get involved, you have to invest a minimum of $25,000. After you invest $25,000, you can purchase them in increments of one dollar. The initial $25,000 is a lot of money for many investors. Also, if something goes wrong, you have risked a substantial amount of money.

Another problem with investing in these bonds is that they are negatively affected by changes in interest rate. Regular bonds benefit from a drop of interest rates. The value of a traditional bond will increase when interest rates in the market decrease. However, with these bonds, this is not the case. When interest rates decrease, homeowners will start to refinance their mortgages which means that you will no longer be able to collect interest from them. If interest rates rise, you are investing in a security with a lower interest rate than what you could get in the market, and in this way continue your income stream.

blog comments powered by Disqus