When it comes to investing, there are so many funds and products to choose from it is a minefield. Deciding on a product will largely depend on your individual circumstances, and what your investment plans and aims are for the long, and short term.
Choosing a fund or product to invest in will also depend on how much you want to invest, and the level of risk you are willing to take when investing.
In this article, we will take a look at investing in Ginnie Mae Funds. We will talk through the advantages and pitfalls of investing in these types of funds, along with what projected return of investment you could expect on average. So let’s take a look at Ginnie Funds in some more detail.
What Is Ginnie Mae
Before we look into detail at Ginnie Mae Funds, it is important to understand what exactly Ginnie Mae does. Ginnie Mae, or the Government National Mortgage Association, is a government agency that works alongside other government agencies to assist with the affordable housing market.
It does this by guaranteeing payments on mortgage-backed securities on time. It also opens up the housing market to lower-income families by opening up the accessibility of mortgage loans.
Ginnie Mae is overseen by the U.S Department of Housing and Urban Development, and its purpose within the housing market is to create liquidity within the market as the secured loans are backed by the U.S government.
How Doe Ginnie Mae Work
Ginnie Mae provides security on mortgages whilst not offering the product themselves. The mortgages are obtained via a mortgage broker in the traditional way. However, Ginnie Mae will then act as a guarantor against the loan, by purchasing the mortgage from the mortgage supplier.
This has a dual purpose within the housing market. Firstly, it allows a wider range of people to access loans to buy houses as their loan repayments are government assured. And secondly, it frees up capital for the lender to fulfill additional loan requests.
What Are Ginnie Mae Funds
The main way that Ginnie Mae is able to create the liquidity to support the housing market is by transferring the mortgages it buys into funds, which are known as GNMA funds. These funds consist of a pool of similar loans which investors are then able to purchase as a bond investment.
Which Mortgage Loans Are Secured By Ginnie Mae
In order to understand how Ginnie Mae works further, let’s take a look at the mortgage loans which Ginnie Mae supports:
FHA Loans are aimed at borrowers who might not have a credit score strong enough to secure a mortgage independently. These loans are underwritten to the requirements set by the Federal Housing Administration and play an important role in keeping the housing market moving.
VA Loans is the loan program designed by the Department of Veteran Affairs and is designed for active duty service members, veterans, and surviving spouses, National Guard personnel, and resrvists.
VA Loans allow eligible lenders to secure a loan with zero downpayment, and offer competitive rates. Additionally, you are able to convert 100% of equity into cash if you score high enough on the FICO score.
Ginnie Mae also supports the Rural Housing Service program under the U.S Development of Agrigulture’s (USDA) loan scheme. These loans aim to provide loan assistance to those living in rural areas.
Similarly to VA Loans, there are no downpayments required for this program. The only criteria is that you have to live in a qualifying rural area, and that everyone in your household cannot make more than 115% of the area median income.
How To Invest In Ginnie Mae Funds
So now that we know a bit more about how Gnnie Mae works, and the type of loans that it is able to support, let’s take a look at how you can invest into Ginnie Mae Funds.
There are two ways in which you can invest in GNMA securities, either directly through Ginnie Mae, or indirectly through a brokerage.
To invest directly in Ginnie Mae Funds, the minimum investment is $25,000. Following this, you can purchase additional securities for as little as $1.
If you are not looking to invest as much as this, you can buy shares in a Ginnie Mae mutual fund directly through a brokerage.
Why Ginnie Mae Funds Are A Good Investment Option
As Ginnie Mae funds are fully backed by the U.S Government, they are an appealing choice for investors as they are generally considered as a low-risk investment option.
Individuals who choose to invest in Ginnie Mae can rest assured that they will receive their dividend checks or monthly payments, regardless of whether Ginnie Mae has received mortgage payments from the homeowner. This honorary system from Ginnie Mae is a huge appeal to investors looking for a safe proof way to invest in their finances.
Due to the nature of how the funds are secured, Ginnie Mae is a good choice for a solid, stable investment as the housing market is considered to be one of the strongest – people will always need a home! For this reason, even when times are tough for families, they tend to prioritise housing costs over other things, keeping the housing market financially stable.
Securing new loans is also a plus for Ginnie Mae Funds. As the housing market is continuously moving, there are always new opportunities for Ginnie Mae to create new funds. The cash flow from investments creates even further lending opportunities, so the cycle continues.
Ginnie Mae Funds can generally expect to return an average of 5% on your investment per annum, although fluctuating interest rates can shift this from between 3.5 to 6.5% per annum.
One last thing to consider about why you should invest in Ginnie Mae Funds, is the positive impact on the community. As an agency, Ginnie Mae is helping people get onto the housing ladder, many of which may not have been able to without the support of its system. By investing in GNMA funds, you are proactively contributing to making housing affordable for all, and that is something you should feel good about! Enabling families to gain ownership of their own home, whilst receiving an annual ROI of around 5%, it’s a win-win!
Ginnie Mae Pros:
- Government-Backed – GNMA Loans are fully federally secured so are an appealing option for investors. Even if Ginnie Mae were to fall into trouble, the Government would secure its assets
- Guaranteed Payments – Ginnie Mae guarantees monthly payments irrelevant of mortgage defaults
- Consistent ROI – An average return on your investment of 5% per annum
- Continuous Demand – The housing market will always be secure as people will always require housing. Therefore, there will always be investment opportunities for Ginnie Mae Funds
- Morally Sound Investing – Positively contributing to reducing housing poverty
Why Ginnie Mae Might Not Be The Best Option For You
Ginnie Mae Funds are generally classified as low risk and as such, tend to have a low level of return in comparison to higher risk investments. GNMA funds also lack the diversity of alternative investment portfolios as each pool of investment is made up of the same product. For this reason, they may not be the right investment if you are looking for high returns on your investment.
Similarly, Ginnie Mae Funds are dependent on a stable and secure housing market. Investors will be faced with the risk of inflation. This could mean inflation outpacing investment returns, and as such, investors will lose their spending power.
It is also worth noting that Ginnie Mae Funds are fully taxable at both federal and state levels. Treasury bonds are only taxable at federal level on any interest earned annually.
Ginnie Mae Cons:
- Low Return Of Investment – Although a stable choice, Ginnie Mae might not be able to increase your investment at the speed of other investment opportunities
- Interest Rate Fluctuation – Fluctuations in interest rates can alter the value of your Ginnie Mae Funds
- High Initial Investment Cost – Standard $25,000 initial investment cost to invest directly into Ginnie Mae Funds
- Fully Taxable – Unlike Treasury bonds, GNMA funds are taxable at both federal and state levels
Whilst like all investments Ginnie Mae carries an element of risk, Ginnie Mae Funds are a popular and stable investment as they are backed by the U.S Government. This means that even if they were to run into difficulties, the U.S Government will step in to prevent Ginnie Mae and its securities from collapsing.
Due to its stable annual return of investment, Ginnie Mae Funds are a good choice for risk averse investors. There is very little risk involved or volatility, although investors should keep in mind that Ginnie Mae Funds will only provide on average a 5% return on your investment per annum. However, if consistency is what you are looking for, then Ginnie Mae could be a very good investment choice for you.