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. Mortgage

    A debt instrument, secured by the collateral of specified real ...
  2. Collateral

    Property or other assets that a borrower offers a lender to secure ...
  3. Reverse Mortgage Financial Assessment

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

    A type of mortgage in which a homeowner can borrow money against ...
  5. Mortgage Rate

    The rate of interest charged on a mortgage. Mortgage rates are ...
  6. Qualified Mortgage

    A mortgage in which the lender has analyzed the borrower's ability ...
Related Articles
  1. Personal Finance

    Understanding the Mortgage Payment Structure

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

    How Do Mortgage Lenders Get Paid and Make Money?

    When homebuyers educate themselves on how mortgage lenders get paid and make money, they are more likely to save thousands of dollars on their mortgages.
  3. 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.
  4. Retirement

    Additional Streams of Income for Seniors

    Find out how a reverse mortgage can work in your favor during retirement.
  5. Personal Finance

    How Regulations Protect Reverse Mortgage Borrowers

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

    What The New Mortgage Lending Rules Really Mean

    Every mortgage rule change has consequences for borrowers, lenders, the housing market and the broader economy.
  7. Personal Finance

    Reduce Interest With An All-In-One Mortgage

    "Offset" mortgages combine a checking account, home-equity loan and mortgage into one account.
  8. 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. When Is Mortgage Insurance Typically Required?

    Learn about the situations in which borrowers may be required to buy private mortgage insurance, and discover who this insurance ... Read Answer >>
  2. 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 >>
  3. 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 >>
  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. 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 >>
  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. Market Capitalization

    The total dollar market value of all of a company's outstanding shares. Market capitalization is calculated by multiplying ...
  2. Frexit

    Frexit – short for "French exit" – is a French spinoff of the term Brexit, which emerged when the United Kingdom voted to ...
  3. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  4. Down Round

    A round of financing where investors purchase stock from a company at a lower valuation than the valuation placed upon the ...
  5. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  6. Portfolio Investment

    A holding of an asset in a portfolio. A portfolio investment is made with the expectation of earning a return on it. This ...
Trading Center