This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

No Need to Bail on Mortgage Funds

This article originally appeared in The Save Safe Plan newsletter. For more information on this product, please click here.

While interest rates steadily plummeted over the past three years, homeowners have rejoiced. Indeed, many seem to have exuberantly taken up refinancing their mortgages as an amusing new hobby. (You know who you are.)

But while today's super-low mortgage rates (the national average is 5.6%, according to BankRate.com) are a boon to homeowners, investors in mortgage-backed securities have little to cheer.

Typically, lower interest rates benefit mortgage funds. As mortgage rates drop in concert with interest rates, the mortgages the funds already hold pay a higher yield than the newer mortgages. But mortgage funds -- usually a better bet than Treasuries -- posted a measly 2.1% in the first six months this year, while long-term Treasury funds have fared more than twice as well, returning an average 5.7%, according to Morningstar.

But while this somewhat startling trend isn't likely to turn around in the next six months, there's no reason to bail on mortgage funds. "If you're looking for an extra kick to your portfolio in the next three to six months, you're probably not going to get it from mortgage funds," says Andrew Clark, a senior research analyst with Lipper, a Reuters company. "But if you're holding a mortgage fund, you don't need to get rid of it. They're still relatively safe, and their yields beat Treasuries. Those are two really good reasons to hold these funds for the long term."

Mortgage funds generally present higher returns than Treasuries because of the moderately higher risk. There's prepayment risk, which occurs when homeowners pay off their higher rate loans with new loans at a lower rate (i.e., refinancing). And then there's extension risk, which happens as interest rates rise and the bulk of the mortgages that a fund holds yields less than the higher-rate mortgages being issued.

1 of 2

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DOW 16,915.07 -70.54 -0.42%
S&P 500 1,964.68 -8.15 -0.41%
NASDAQ 4,396.2040 -22.83 -0.52%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto
Advertising Partners

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs