Pledged Asset

What is a 'Pledged Asset'

A pledged asset is transferred to a lender for the purpose of securing debt. Homebuyers can sometimes pledge assets, such as securities, to lending institutions to reduce the necessary down payment. Thus, these securities would not have to be sold to meet the down-payment requirements, allowing for capital appreciation while maintaining the associate mortgage benefits.

BREAKING DOWN 'Pledged Asset'

The type and amount of pledged assets for a loan are negotiated between the lender and borrower. Because pledged assets give lenders a sense of security, pledged-asset loans typically provide borrowers better interest rates than unsecured loans.

Pledged-Asset Mortgage

A pledged-asset mortgage is recommended more for a borrower in a high income tax bracket. The mortgage may be a good choice if the investment used as collateral has a greater rate of return than the interest on the loan, or if selling the assets would result in paying higher taxes. A pledged-asset mortgage may also help a relative become a homeowner without a cash down payment if the investment owner provides the securities as collateral.

With a traditional mortgage, the house alone is used as collateral for the loan. Banks require a 20% down payment so buyers do not end up owing more than their home's value. Without the down payment, the buyer pays a monthly fee for private mortgage insurance (PMI) and a potentially higher interest rate. In contrast, borrowers with a pledged-asset mortgage may avoid paying PMI or being charged a higher interest rate by providing securities and the home as collateral.

Qualifying for a Pledged-Asset Mortgage

When qualifying for a pledged-asset mortgage, the borrower typically needs a higher value of securities than the down payment would be on the home. If the securities' value drops, the bank may require that the borrower put more money in the account. Assets in an individual retirement account (IRA), 401(k) or other retirement account may not be used. The borrower transfers the assets into an account the lender controls. The borrower may still trade securities within the account, although riskier types of trading such as options trading or buying low-value stocks may be prohibited.

Pros and Cons of a Pledged-Asset Mortgage

A pledged-asset mortgage lets the borrower keep assets in potentially lucrative investments and avoid tax penalties associated with selling the assets. However, the borrower could lose both the home and the securities if he defaults on the mortgage. This is an especially important consideration when providing collateral for a relative's pledged-asset mortgage. In addition, by not making a down payment, interest is paid on the full price of the property. The borrower may make a profit from the investment being used as collateral, but the ability to trade is limited if the investments are stocks or mutual funds. Overall, the borrower may end up spending more than necessary on the home with a pledged-asset mortgage.

RELATED TERMS
  1. Secured Note

    A type of loan that is backed by the borrower's assets. If a ...
  2. Mortgage

    A debt instrument, secured by the collateral of specified real ...
  3. 100% Mortgage

    A mortgage loan in which the borrower receives a loan amount ...
  4. Reverse Mortgage Financial Assessment

    A review of the borrower’s credit history, employment history, ...
  5. Reverse Mortgage

    A type of mortgage in which a homeowner can borrow money against ...
  6. No-Cost Mortgage

    A mortgage refinancing situation in which the lender pays the ...
Related Articles
  1. Personal Finance

    Top 6 Mortgage Mistakes

    These common errors could end in foreclosure.
  2. Investing

    Understanding the Mortgage Payment Structure

    We explain the calculation and payment process as well as the amortization schedule of home loans.
  3. Personal Finance

    Financing Basics For First-Time Homebuyers

    If you're looking to get your first mortgage, there are many financing options available.
  4. Personal Finance

    What Is A Mortgage?

    A mortgage is a loan used to purchase a home, where the property serves as the borrower's collateral.
  5. Retirement

    Additional Streams of Income for Seniors

    Find out how a reverse mortgage can work in your favor during retirement.
  6. Retirement

    How Regulations Protect Reverse Mortgage Borrowers

    They're complex animals, which is why there are government guidelines in place to protect borrowers.
  7. Personal Finance

    Mortgage Basics: Costs

    By Lisa SmithPeople generally think about a mortgage in terms of the monthly payment. While that payment represents the amount of money needed each month to cover the debt on the property, the ...
  8. Personal Finance

    Understanding The Mortgage Payment Structure

    While a mortgage’s size and term set the baseline, the interest, taxes and insurance all influence the amount of the monthly payment.
  9. Personal Finance

    What Is Collateral?

    Collateral is property or other assets that a borrower offers a lender to secure a loan. If the borrower stops making the promised loan payments, the lender can seize the collateral to recoup ...
  10. Financial Advisor

    Reverse Mortgages: Right for Clients? Not Often

    Reverse mortgages are a legitimate vehicle for folks age 62 and up to tap into the equity in their homes for other uses. Here's what to consider with them.
RELATED FAQS
  1. How does the loan-to-value ratio affect my mortgage payments?

    Understand what the loan to value ratio is, how the ratio is calculated and learn how it has an impact on your mortgage payments ... Read Answer >>
  2. What is PMI, and does everyone need to pay it?

    Also known as "Primary Mortgage Insurance," PMI is the lenders (banks) protection in the event that you default on your primary ... Read Answer >>
  3. What’s the difference between a mortgage lender and a mortgage servicer?

    Buying a home is an exciting and confusing process. Once the loan is secured, it's important to know who gets the payment: ... Read Answer >>
  4. What is the 1003 mortgage application form?

    Learn about the 1003 mortgage application form, what information it requires and why this form is the industry standard for ... Read Answer >>
  5. Why would a homebuyer need to take out PMI (private mortgage insurance)?

    Learn why some home buyers are required to take out private mortgage insurance (PMI), and how it affects the total monthly ... Read Answer >>
  6. Why does the loan-to-value ratio matter?

    Learn how the loan-to-value (LTV) ratio is calculated, and why this metric is important to lenders when evaluating a home ... Read Answer >>
Hot Definitions
  1. Duration

    A measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. ...
  2. Dove

    An economic policy advisor who promotes monetary policies that involve the maintenance of low interest rates, believing that ...
  3. Cyclical Stock

    An equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies ...
  4. Front Running

    The unethical practice of a broker trading an equity based on information from the analyst department before his or her clients ...
  5. After-Hours Trading - AHT

    Trading after regular trading hours on the major exchanges. The increasing popularity of electronic communication networks ...
  6. Omnibus Account

    An account between two futures merchants (brokers). It involves the transaction of individual accounts which are combined ...
Trading Center