How to Cash in an Old Income Mortgage Bond
Original post by Leslie McClintock of Demand Media
Mortgage bonds are useful investments for income-oriented investors because they provide a comparatively high level of income relative to those available on treasury securities. However, mortgage-backed bond performance is closely tied to default rates on mortgages. If you need to get out of a mortgage-backed bond that you have held for a while, it is not difficult, but you may need to sell the bond at a discount.
Contact the broker or brokerage firm that sold you the bond in the first place. In most cases, the brokerage company holds the bond for you, under the "street name," meaning the brokerage firm is technically the registered owner of the security, and just forwards the income streams on to you or credit your brokerage account.
Inform the broker that you want to sell your position for cash. Keep in mind that if you sell the bond at a higher price than you bought it for, you will be liable for capital gains tax on any profits, unless you held the bond in a tax-free or tax-deferred account, such as a traditional IRA or Roth IRA.
Verify that the order went through. While errors are rare, they do happen, and sell tickets occasionally get lost or there is a delay in execution through human error, technical error, or simply a lack of market liquidity. This is particularly true of infrequently-traded bonds. Look for the transfer of cash to your account or the check in the mail.
Tips & Warnings
- If you sell a bond for a price lower than the price you bought it for originally, you can claim a capital loss. You can use those capital losses to offset capital gains elsewhere in your portfolio, reducing your tax bill. You can also use any excess capital losses to offset up to $3,000 worth of ordinary income, and carry forward any unused losses to future years.
- U.S. Securities and Exchange Commission: Mortgage-Backed Securities
- USA Today: Mortgage-Backed Securities Are Offering Decent Returns
About the Author
Leslie McClintock has been writing professionally since 2001. She has been published in "Wealth and Retirement Planner," "Senior Market Advisor," "The Annuity Selling Guide," and many other outlets. A licensed life and health insurance agent, McClintock holds a B.A. from the University of Southern California.