If you have an investment account containing a stable financial asset you can now pledge that asset, or a portion thereof, instead of liquidating the asset and making a down payment in cash.

Let’s assume you have $800,000 in a Certificate of Deposit. Your son and daughter-in-law are buying their first home and you’ve promised to help. They’re purchasing a $900,000 home, are strong on income and credit, but lack the cash to make the required down payment of 30%. They do, however, have enough to pay 10% down.

If you cash in your CD you’d lose the earning ability of your principal (remember, that money is working even as you sleep). It’s likely you’ll also incur an early withdrawal penalty.

Instead of liquidating the CD and applying the funds directly to the purchase, you can pledge 20% of the purchase price, $180,000. Your 20% asset pledge, along with the 10% down payment made by your son secures the lender by covering the 30% down payment requirement. Your son gets a 70% loan of $630,000 with no mortgage insurance.

This allows your money to keep working while also facilitating the purchase of your son’s first home. In addition, you still own the Certificate of Deposit along with all interest earned (and if this were an investment type asset you’d also enjoy the capital growth, dividend income, voting privileges, etc). Moreover, there is no alteration to the asset and you can still execute trades within your portfolio (assuming it’s that type of asset). Acceptable assets include stocks, bonds, mutual funds, CDs, money market accounts and savings accounts.

There are a few more things that should be noted:

1. The pledged asset does not have to be owned or pledged by a family member—you could do this for the child of a friend.
2. Though not for everyone, many of our clients select this product because the person pledging does not have to liquidate hundreds of thousands in cash, and the borrower eliminates mortgage insurance. 
3. Also, in relation to investment accounts, there’s avoidance of capital gains and you won’t suffer the loss of earnings and capital growth.
4. PLEDGE RELEASE (Loan Paydown): The loan can be paid down at any time and the pledge may be Released. There are no prepayment penalties.
5. PLEDGE RELEASE (Home Appreciation): If the home appreciates in value rendering the pledge unnecessary, usually a minimum of 36 months must have passed. In this scenario Release is solely at the banks discretion and the borrower must be current with no late payments in the past 12 months.
6. PLEDGE RATIOS (Stable Assets): If it’s a Stable Asset category (savings, money market, CDs, etc.) the ratio is 1:1 meaning $1 pledged is equal to $1 in collateral, or $100,000 pledged equals $100,000 in collateral.
7. PLEDGED RATIOS (Volatile Assets): For investments deemed riskier by the bank (these are evaluated on a case-by-case basis), $1 pledged may be equal to .75 cents in collateral (or some other negotiated factor), for example, $100,000 pledged equals $75,000 in collateral. 

For a clearer picture regarding the practical impact of a Pledged Asset Mortgage, see the Table below: