Securities Based Mortgage
Here is a method to obtain a home mortgage without putting down a traditional down payment, it’s called a Securities Based Loan. These types of mortgages aren’t new, however, they aren’t typically advertised either. These mortgages are specially designed for borrowers who have sufficient income to make monthly payments toward a home, but who have all their ready cash tied up in some sort of investments. Pledged-Asset Mortgages allow borrowers to capitalize on savings without spending them and avoid down payment requirements by pledging their financial assets. You are be able to use almost any type of an investment, including mutual funds or a stock portfolio, however bonds offer higher lending capabilities due to their relative stability.
Here’s how a Securities Based Loan works. You don’t make a cash down payment, but pledge your assets instead. Let’s say you want to buy a $1,000,000 home, and you have $200,000 in stocks, Certificates of Deposit, or any other type of investment. You can either liquidate the investment and use the proceeds for the down payment, or you can use the investment as collateral for the loan.
A Securities Based Loan generally makes sense for people in a high income tax bracket. This sort of loan is an excellent option if the financial asset you are pledging has a higher expected rate of return than the interest rate on the mortgage, or when the assets you are pledging could cause you capital gains income tax grief if you were to convert them to cash.
Benefits of Pledged-Asset Mortgages:
- You continue to own the investments that are pledged and continue to make any interest or profit that they generate.
- In many cases the borrower can avoid having to take out mortgage insurance on the loan.
- Interest on mortgages may be tax deducible
Disadvantages of Pledged-Asset Mortgages:
- The assets you pledge may be tied up as collateral until you have positive equity in the real estate.
- Keep in mind that since you are borrowing more money you are paying more interest than you would have paid if you had cashed in the investments and used that money for the down payment. Therefore you have to consider the return on your investments and compare the interest being paid on the mortgage.
Securities Based Line of Credit (SBLC) may not be suitable for all clients. The proceeds from an SBLC cannot be (a) used to purchase or carry securities; (b) deposited into a Raymond James investment or trust account; (c) used to purchase any product issued or brokered through an affiliate of Raymond James, including insurance; or (d) otherwise used for the benefit of, or transferred to, an affiliate of Raymond James. Raymond James Bank does not accept RJF stock or any securities issued by affiliates of Raymond James Financial as pledged securities towards an SBLC. Borrowing on securities based lending products and using securities as collateral may involve a high degree of risk including unintended tax consequences and the possible need to sell your holdings, which may lead to a significant impact on long-term investment goals. Market conditions can magnify any potential for loss. If the market turns against the client, he or she may be required to quickly deposit additional securities and/or cash in the account(s) or pay down the loan to avoid liquidation. The securities in the Pledged Account(s) may be sold to meet the Collateral Call, and the firm can sell the client’s securities without contacting them. A client is not entitled to choose which securities or other assets in his or her account are liquidated or sold to meet a Collateral Call. The firm can increase its maintenance requirements at any time and is not required to provide a client advance written notice. A client is not entitled to an extension of time on a Collateral Call. Increased interest rates could also affect LIBOR rates that apply to your SBLC causing the cost of the credit line to increase significantly. The interest rates charged are determined by the market value of pledged assets and the net value of the client’s non-pledged Capital Access account. Securities Based Line of Credit provided by Raymond James Bank. Raymond James & Associates, Inc. and Raymond James Financial Services, Inc. are affiliated with Raymond James Bank, a Florida-chartered bank.
