Remember “no down payment” mortgages? These were the kinds of loans that often led to foreclosures during the real estate bust a few years ago. They’re making a comeback – but in a different form.
In their new incarnation, home buyers put up their home and a portion of their investments as collateral. The amount of a portfolio that must be pledged depends in part on the nature of the investments – a larger amount must be pledged if they consist of stocks rather than bonds, for instance. The homeowner keeps ownership of the investments, although there are some restrictions imposed by the lender, and typically the investment account must be held at the lender’s institution.
The advantages for buyers are that they (1) don’t have to sell appreciated stocks and pay capital gains taxes to fund a down payment, (2) may get a larger mortgage interest deduction, and (3) may come out ahead if their investments return more than the mortgage interest rate.
Of course, there are dangers, too, since homeowners will have put their personal assets as well as their home at risk if anything goes wrong.