A mortgage-backed security is like a piggy bank that gets filled by many people paying their house payments.
Imagine you have a group of friends who each borrowed money to buy a toy. Every month, they give you some coins as payment. You put all those coins into your piggy bank. That piggy bank is like a mortgage-backed security, it's made up of many little payments from different people who are paying back loans for their houses.
How It Works
When someone takes out a mortgage (a loan to buy a house), they promise to pay it back over time, usually with monthly payments. These payments include both the money borrowed and the interest.
A mortgage-backed security is like taking all those monthly payments from many different people and grouping them together into one big package that investors can buy. It's like collecting coins from all your friends and putting them in a special piggy bank that other kids can buy.
When someone buys this "piggy bank," they get the money from all those monthly payments, just like you would if you opened your piggy bank and took out the coins.
Examples
- When you pay back your loan, it helps the investors who bought that slice.
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See also
- What are liquidity premiums?
- How does inflation affect our purchasing power and investments?
- What are market expectations?
- What is Focusing on big, strong investments?
- What are other investments?