Conservative investors desiring income can do better than many other alternatives by investing in federally guaranteed and federally backed mortgage notes. The notes issued by Ginnie Mae, Freddie Mac, and Fannie Mae often provide yields 1% to 1.5% better than Treasury notes. And for investors willing to make the required tradeoff, the extra income can be welcome.
Mortgage notes have an implied AAA rating. Therefore, the credit markets do not consider them to have more credit risk than treasury securities. But while treasury securities have a fixed maturity date, mortgage notes do not. And you get a higher yield for accepting that variability.
When you invest in mortgage notes, you are lending your money to a group of people to buy homes (with the federal agency or federally sponsored corporation guaranteeing your money). At any time, the borrowers can move and payoff their mortgage or refinance, and you will get paid back. For many seniors, this is not a big negative because the return of their principal is of utmost importance, which is assured if you hold the notes to maturity (various maturity options are readily available).
If extra income is desired without sacrifice of credit quality, check off for information on mortgage notes. (Note that with mortgage securities, the yield and average life consider prepayment assumptions that may or may not be met. Changes in payments may significantly affect yield and average life. Both treasury securities and mortgage notes have a fixed percentage yield and treasury securities have a fixed maturity).
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