A Pledged Asset Mortgage is Better than Having a Down Payment, or Is It?

Pledged Asset Mortgages are designed to help home buyers who wish to purchase a home but aren’t able to make a down payment. Instead of making a down payment, the home buyer is required to use assets such as stocks or mutual funds as collateral. A Pledged Asset Mortgage is also known as an Asset-Backed or Asset-Integrated Mortgage, and it is generally geared towards borrowers who can afford making monthly mortgage payments, but have all of their cash tied up in different investments.

How a Pledged Asset Mortgage Works

With a Pledged Asset Mortgage, you won’t have to make a down payment on your mortgage loan, but you will have to use a financial investment instead. For example, if you have $30,000 in stocks, you can use that investment as collateral for the loan, without having to use a down payment. Alternatively, you can cash in the stocks and use the money for the down payment.

Pledged Asset Mortgages are generally recommended for someone in a large income tax bracket. This type of mortgage loan is a great choice if the investment used as collateral has a bigger rate of return than the interest on the loan or if the assets used can require you to pay higher taxes if you cash them in. These are also a great choice for those who wish to help a relative become a home owner, but don’t want to put down cash as a down payment. This way, you can still make a profit on your investment and the relative that you are helping will still get to become a home owner.

Pros and Cons of Pledged Asset Mortgages

The first obvious benefit of Pledged Asset Mortgages is that there is no need to pay a down payment on your loan. You get to use an investment as collateral instead of a down payment, while still generating a profit from the investment that you used. By taking out a Pledged Asset Mortgage, you can avoid paying mortgage insurance in most cases, so that’s another benefit that this type of loan will bring.

The biggest downside is that if you default on your mortgage, you will lose both the assets that were used as collateral and your home. This is especially worth taking into account if you are pledging your assets for someone else, like family of friends. Another disadvantage is that because you are not making a down payment, you will have to pay interest on the full price of the property. You can still make a profit from the investment that you are using as collateral, but your ability to trade will be limited if these investments are stocks or mutual funds.

Think long and hard before taking out a Pledged Asset Mortgage instead of making a down payment. In most cases, the cons outweigh the pros and you will only end up spending more than you should on your home. Of course, this will depend on many factors and the only person who can decide if an option is better than the other is you. Either way, the best way to come to a conclusion is to analyze both options very carefully and take all of the advantages and disadvantages into consideration.

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