Pledged Asset Loan programs are a little known but amazingly effective alternative to liquidating one’s personal or business assets to make a down payment on a jumbo or super jumbo residential mortgage. Also referred to as Asset-Integrated or Asset-Backed mortgages, pledged asset mortgages enable borrowers to purchase luxury real estate with little or no money down without incurring withdrawal penalties, capital gains taxes, or loss of appreciation or passive income from their existing investments.As if those aren’t enough reasons to evaluate pledged asset jumbo loans, pledging your assets can also save tens of thousands of dollars a year by allowing you to eliminate the need for private mortgage insurance, or PMI.While you probably won’t find a pledged asset mortgage loan program at your bank, they are available in most states through mortgage companies who specialize in handling high net worth clientele.Â Updated 09/15/2007
Normally, if you are purchasing a new house, vacation home or rental property, especially if the purchase price of the property is over $1 million, chances are your bank will ask you to put some cash down.While most lenders require borrowers to make down payments in cash, very few borrowers keep that much cash in checking or savings accounts earning little to no interest.Instead, the typical jumbo or super jumbo mortgage applicant’s assets are wisely invested in well rounded portfolios of stocks, bonds, mutual funds, ETFs, commodities and other exchange traded asset classes which tend to deliver a rate of return substantially in excess of the interest on a typical mortgage loan. Liquidating such assets can result in significant penalties on assets with maturity dates and exit or early withdrawal penalties.Even worse, short term capital gains taxes can drastically increase the cost of making a cash down payment.
- Lower Cash Down Payment
- Investment Returns vs. Mortgage Interest
- Maintain Control of Investment Decisions
- Benefit from Passive or Investment Income
- Avoid Capital Gains Tax on Liquidation
- Eliminate Private Mortgage Insurance
How Does a Pledged Asset Mortgage Work?
Let’s say you’re buying a 2 million dollar home.A typical down payment required for a borrower with excellent credit would be 20% of the contract sales price of the home, or $400,000.In a conventional bank loan, the borrower would have to liquidate $400,000 from his investments which could cost as much as $580,000 after capital gains taxes, not including any penalties for withdrawal.In a pledged asset program, you would pledge, or set aside $400,000 in assets as collateral.While programs vary, the assets pledged as collateral may generally be stocks, bonds, mutual funds, ETFs, certificates of deposit, certain exchange traded commodity portfolios, and more.The mortgage company will hold the pledged assets, however the borrower retains control of the assets and can freely trade inside the collateral account.Income generated from within the collateral account, be it divided, interest or capital gain may be moved out into the borrowers other account or taken as profit.In fact for the most part, a pledged asset mortgage allows borrowers all the flexibility of making a cash down payment along with all the control of managing their own money inside their existing investments.
UPDATE: Market Conditions affecting mortgage backed securities and other credit instruments and derivatives have significantly impacted the ability of most financial institutions to make super jumbo mortgages. Many have responded by drastically increasing the level of down payment required as well as requiring full documentation of the borrowers’ income. Pledged asset mortgages and other niche, private bank products have seen a tremendous resurgence in demand as a result of these constraints on the conventional lending industry.
For more information about how pledged asset mortgages can help make your next $1 million to $40 million dollar luxury home purchase or super jumbo cash out refinance with little to no money down or in reserve, contact the super jumbo mortgage specialists at R1 Private Client Group.