You can buy mortgage-backed securities (MBS) through your bank or broker with roughly the same schedule as any other bonds. You would pay between 0.5 and 3 percent, depending on the size of the bond and some other factorsMortgage-backed securities are very close to a worry-free investment. They pay relatively high rates and are considered very safe. They are readily available and are easy to buy and sell on the secondary market.
When rates are dropping, mortgage-backed securities typically get paid off early, so the investor’s high rate of return is cut short early -during a period when it is more difficult to find high-yielding investments. During periods of low rates, you face an extension risk – the very high likelihood that if rates rise, homeowners will sick with their lower-interest mortgages through the full term, leaving you with a low return for years to come. Fortunately you do receive some compensation for that risk in the form of interest rates that average 1 to 2 percent higher than most government bonds.No question, the biggest concern for MBS owners is the prepayment risk and the extension risk.
The perfect pick for mortgage-backed securities would be to an MBS that represents a pool of older, lower-interest mortgages that the mortgage holders would be unlikely to pay off early. An MBS trades like any other bond – as interest rates rise, the price of older, lower-yielding mortgage-backed securities drops to compensate for the lower yields. So because of the discount, in times of rising interest rates you still get an MBS with a yield that is competitive with the rest of the fixed-income market. But because you MBS represents a pool of earlier mortgage-with lower interest rates, your risk of prepayment is sharply reduced.
Otherwise, buying MBS is similar to buying other types of traditional bonds. During periods of low interest rates, you might want to buy a shorter-term MBS on the secondary market so that you are not suck with a low yield for too long. During periods of high interest rates, you can buy an MBS and enjoy the high rates for as long as possible – particularly if you buy one that represents earlier, lower rate with a lower risk of prepayment. Either way, you’re buying into an investment that should provide a better current yield than government bonds and many corporate bonds.