Down Payment Got You Down? Try a Pledged Asset Mortgage
By: Freeman Liz
June 15, 2009
Yes, the stock market has been improving lately, yay. But selling stocks to fund a down payment on property could still leave you with a big fat loss you'd rather not take.
How it Works:
Instead of selling off your stocks to make your down payment, this type of loan allows you to keep your assets--stocks, bonds, CDsand put them in an account maintained by the lender. The pledge functions as your down payment. You can still manage that account--buy and sell stocks, convert it to cash or bonds, whatever investments fall within your arrangement with your lender. But you can't withdraw funds without the lender's permission.
Being Unconventional
Many areas come with steep housing prices. And conventional lenders either don't want to make larger loans or the surcharges required are prohibitive. And you don't want to pay mortgage insurance either--another expense if you don't have at least 20% to throw down when you buy.
What Goes Down.....
Today, stocks and housing have been beaten down pretty badly. If you think there is nowhere to go but up, this could be your chance--invest in undervalued real estate while keeping your irons in the fire in the financial markets. Your investment accounts don't remain static--they increase and decrease with financial markets (unless you are completely into CDs or cash), so your pledged-asset account requires a cushion. For example, one bank requires an extra 30% cushion invested in the pledged account--for example, if you made a $100,000 down payment on a property, you would pledge $130,000. The lender reviews the account value periodically, and if it drops to 110 percent of the pledged amount, for example $110,000, you would have to add funds to get back to 110 percent floor. It's like a margin call if you leverage your stock purchases.
Pledged asset mortgages lost their popularity when property values were skyrocketing and lenders were offering low-down-payment mortgages to all. With the current lending climate, even "make sense" mortgages, that is, loans to those with excellent credit and assets, are becoming harder to find. Pledged asset mortgages may be a solution to sophisticated investors who have plans for their money that don't include cashing out and handing it to a bank.
