|
100% Mortgages: The Low Down on No Money Down
Don't have the cash for the down payment on your dream house? At some brokerage firms that offer up to 100% loan-to-value ratio mortgages or pledged-asset mortgages, that's not a problem.* In lieu of a down payment for a mortgage, customers can pledge their stocks, bonds, mutual funds, and other securities. While brokerage firm Web sites and brochures often tout the advantages of 100% mortgages, such as allowing investors to avoid private mortgage insurance or liquidating their securities, they may overlook or consign to the fine print the risks associated with these mortgages.
NASD is issuing this Alert because 100% mortgages are not suitable for everyone. We are concerned that many investors are not aware of the risks of 100% mortgages and do not understand that the securities they pledge in lieu of a down payment may be liquidated if the value of the securities drops below a certain level or they default on their mortgage.
Before you decide to apply for a 100% mortgage, make sure you understand the following risks:
Even after you obtain your mortgage loan, you may be required to deposit more cash or securities if the value of the securities you pledged falls below the minimum required by your firm.
Your firm can force the sale of securities in your account to meet a collateral call.
Your firm can sell your securities to meet a collateral call without contacting you.
You are not entitled to choose which securities in your account are sold to meet a collateral call.
You are not entitled to an extension of time to meet a collateral call.
If you default (stop making your monthly payments) on your mortgage, you could lose both your house and the securities you pledge.
This Alert will explain these risks and provide you with some basic facts about 100% mortgages.
How 100% Mortgages Work
A typical 100% mortgage or pledged-asset mortgage requires little or no cash down payment. Instead, you pledge securities in your brokerage account in lieu of a down payment, allowing you to finance up to 100% of the value of your home. The amount of securities you will have to pledge can vary depending on the type of securities you pledge and the terms of the mortgage. The amount you pledge usually exceeds the amount required, thereby allowing for some fluctuation in the value of the securities. However, if value of the securities you pledged goes down below a minimum amount set by the firm, your firm may issue a collateral call, which is a demand that you deposit additional cash or securities. If you can't do so or the value of the securities continues to decline, your firm may sell some or all of your securities, sometimes even without notifying you.
100% Mortgage Costs
Since you are borrowing more money with a 100% mortgage, you are probably paying more interest than you would have paid if you had made a cash down payment. This may make sense if you're able to achieve returns on your investments that are greater than your mortgage payments, but there can be no assurance that you will enjoy these investment returns. Moreover, if you choose an adjustable-rate 100% mortgage and interest rates rise, the returns in your investment portfolio may not keep up with your rising mortgage payments, particularly if you have bonds or other fixed instruments, which typically decline in value when interest rates rise. Even worse, with an adjustable-rate mortgage, if the securities markets decline at the same time that interest rates rise, you may be stuck with both larger mortgage payments and thousands of dollars in market losses. By contrast, if you sold your securities to come up with a cash down payment, you not only would have avoided any risk to those securities of a market decline, but you also would have a smaller mortgage and probably pay less interest.
100% Mortgage Risks
article continues here
|
|
