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Pledge Your Real Estate

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Posted On: 04/17/2013

Question:

Several years ago I was the beneficiary of an estate that left a house and some money. The home currently has a mortgage balance of $425,000 and a 5.625 interest rate. I would like to refinance to a lower rate, but lenders refuse, because I have not worked in five years. What can I do?

Answer:

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There are two issues here. First, is the property now worth more than $425,000, or is equity also a concern?

Second, you may not need a “mortgage” in the traditional sense. Let's say the property is worth $425,000. Add 25 percent to that amount ($106,250) and you get a total of $531,250. Now go to a lender who works with the rich and tell them you want a “pledged asset mortgage.”

To create a $425,000 PAM at today's rates, you pledge the property and an account held by the lender with stocks, bonds or cash. In this case, you are willing to put up assets worth $531,250. As it happens, 80 percent of this sum is $425,000.

The stocks and bonds in the account continue to yield dividends and interest that go to you, and hopefully such assets increase in value. Meanwhile, the rate on your mortgage drops from 5.625 percent to, say, 3.5 percent by refinancing. If we compare costs for principal and interest the monthly expense of a $425,000 loan at 5.625 percent is $2,447. At 3.5 percent the cost of the same loan is reduced to $1,908. You save about $540 a month or almost $6,500 per year.

Not every lender provides PAM financing, but those who work with wealthy individuals often do. Speak with lenders for specifics, restrictions and charges, and with a tax professional to assure that the portion of the debt represented by the property remains tax deductible.

Also, ask a fee-only financial planner to review PAM loan offers to determine the best option.

Peter G. Miller is the author of The Common-Sense Mortgage and a veteran real estate columnist. Have a question? Please write to peter@ctwfeatures.com.

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