No. of Recommendations: 0
GNMAs freshly issued are new 30 year mortgages. The government
agency packages a bunch of them together and sells pieces of
the pot.
Every time somebody decides to pay off their mortgage early
by refinancing, or by moving, the investors get a chunk of cash
back. Return of principal, not taxable. A piece of the investment
will last 30 years, but over the life of the investment you get
chunks of it back, mostly at inconvenient times when interest rates
are down and it is difficult to reinvest at a decent rate.
They pay a little more than bonds, but you earn the premium in
inconvenience. Every month a little bit comes back as people pay
down the principal.
I have one that has its final maturity next year. From an
initial principal of $40000 there is $115 in principal left. The
interest each month now is less than a dollar.
In the initial years the yield is decent.
The thing is, you have to have the discipline to have a means
of reinvesting that $10 or $30 or whatever that comes back in
principal every month, along with the occasional $1500. Keeping
it in a money market with the broker is OK, as long as you don't
touch that money market to pay your credit card or paint the house.
In the current market, I'd vote either for municipal bonds or
preferred stocks.
Best wishes, Chris
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