What are Ginnie Mae Bonds?
Ginnie Mae bonds are securities investments offered by the Government National Mortgage Association (GNMA or Ginnie Mae). They are an example of a mortgage-backed security, as Ginnie Mae generates these bonds by pooling mortgages and selling them in packages to investors. Investing in Ginnie Mae bonds can yield better returns than many other government securities, and is also safer than investing in mortgage-backed securities on the open market. These investments are not risk-free, however.
GNMA acts as a backer for residential mortgages. It buys up mortgages from banks and other lenders, and either retains them, sells them to private investors, or sells them to investment firms. By buying up loans, GNMA makes it possible for lenders to originate new loans. The agency helps keep funding available for housing and ensures affordable interest rates. GNMA works to increase home ownership in the United States.
There are several benefits to Ginnie Mae bonds as an investment tool. People can trade them on secondary markets as a liquid asset, and because the government backs them, they are highly reliable. People will get returns on the bonds as people repay principal and interest on their mortgages and the returns are steady and dependable. People who want the security of government-backed securities and the higher returns available through the open market may find an acceptable compromise with Ginnie Mae bonds, where they get higher returns, but can still invest safely.
As of 2011, investors needed a minimum of $25,000 United States Dollars (USD) in invest in Ginnie Mae bonds. This minimum investment can be a significant barrier to people who want to invest in this financial product and may pose a risk if people sink all their available funds for investment into Ginnie Mae bonds; if something goes wrong, the investor has lost everything. Another risk with Ginnie Mae bonds is prepayment. People can choose to pay off their mortgages early, depriving investors of interest earnings.
Individual investors can weigh the pros and cons of Ginnie Mae bonds to determine if they are a good choice. Financial advisers may also have recommendations. It is generally a good idea to diversify investments as much as possible, and if such bonds would make up a large portion of someone's portfolio because of the big initial investment requirement, they may not make the best available choice. It is important to be aware that these bonds do not offer guaranteed returns, although it is possible to project returns; someone could theoretically buy $100,000 USD worth and the bond could be redeemed the very next day as a result of mortgage prepayments, with no interest earnings for the buyer.
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