How to Buy Mortgage Backed Securities

If you like a cash stream from your investment then you may be interested in a mortgage backed security. Mortgage backed securities provide a payment from hundreds of mortgages. Each payment consists of principal and interest, so the money you receive is partially return of your investment.

Difficulty:

Moderate

Instructions

1. Understand that when you're buying a mortgage backed security, the money you receive is partially your initial investment. If you spend that money, you're depleting your asset. Make certain that you look at the interest rate not the payment to compare.

2. Know that there are several forms of mortgage backed securities. There are mortgage pass through securities, a group of mortgages packaged and sold as "shares" of a pool. CMO's or collateralized mortgage obligations are larger groups broken up into tranches to meet different needs. These tend to be more inexpensive to purchase. Tax advantaged CMO's are called Real Estate Mortgage Investment Conduits (REMIC).

3. Select from government backed mortgages like the Ginnie Mae, governmentally sponsored like the Freddie Mac or Fannie Mae, or a private label such as a bank mortgage. You can also purchase mutual funds based on mortgage backed securities.

4. Purchase mortgage backed securities from your local broker. You must open a brokerage account first. The broker will then purchase the mortgage backed security. There is a cost for the purchase, but not the brokerage account. Minimums on mortgage backed securities are $25000 with CMO's as low as $5000.

5. Open an online account. Many of the discount brokerage houses now allow the purchase of mortgage backed securities, thus saving greatly in the cost of brokerage fees.

6. Purchase mutual funds specializing in mortgage backed securities through a broker or directly through the mutual fund. If making monthly automatic purchases, some funds may allow you to invest as low as $25 per month.