What is a mortgage-backed security?

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A mortgage-backed security is a type of investment that is made up of a bundle of individual mortgages. These mortgages are typically grouped together based on similar characteristics such as credit scores or geographic location. The payments that homeowners make on their mortgages are then used to pay out interest and principal to the investors who hold the mortgage-backed security. This type of investment can be attractive to investors because it allows them to diversify their portfolio and potentially earn a higher rate of return than they would with other types of fixed-income investments.

What Is a Mortgage-Backed Security