A conventional mortgage might call for a home buyer to make a 20% down payment. Several brokers now offer no-down-payment mortgages: an affiliated lender advances the full purchase price of the house. Result: Instead of a $200,000 mortgage on a $250,000 home, for example, you’d have a $250,000 mortgage.
Collateral: In these programs, the lenders get protection in the form of collateral. Generally, you have to pledge 20%-40% of the home’s value as security for the loan. Thus, in the case of a $250,000 mortgage, $50,000 to $100,000 worth of assets in the your brokerage account would back up your obligation to make the mortgage payments.
The advantages: They allow your portfolio to stay in place, for long-term wealth accumulation. There’s no need to liquidate securities, to raise money for a down payment, and perhaps pay capital gains tax.
On the other hand, you have more debt and the annual costs of servicing that debt will be higher. At 8%, for example, you’d pay $20,000 per year on a $250,000 mortgage rather than $16,000 on a $200,000 mortgage. What’s more, a decline in the value of the assets securing the loan may lead to a call for more cash or securities as collateral. The lender might be able to freeze undersized accounts and move assets into safer investments with less upside potential or even sell assets securing the loan to raise cash.
Thus, it may make sense for some investors to assume the risks of additional leverage. The money that does not go into a down payment can be invested and you may earn more investing than the cost of a mortgage. That is, if you can earn more than 8% you’ll come out ahead. A solid portfolio of stocks and stock funds is likely to outperform mortgage rates over the long-term. (See item 6 below.)
