# How much equity do I need for a pledged asset mortgage to prevent PMI?

I've been saving up to buy a home, and I've primarily grown this money with stock investments. When I do decide to buy a home, I'm not too fond of the idea of putting all my savings into a mortgage down payment and using the rest to pay for capital gains tax. Instead I'd like to continue to grow my investments in the stock market so that I can eventually use the proceeds to pay off my mortgage over time.

As such, I'm interested in a pledged asset mortgage and want to find out how much in securities equity a lender would require me to have so that I wouldn't need to make a down payment or pay for PMI. Realistically I would put some money into a down payment, but I would like to know how much in pledged assets would equate to a 20% down payment to avoid PMI and work from there.

Research and Examples:

I did find this resource from Charles Schwab Bank which provides a form to look up the advance rate for individual market securities. For instance AAPL has a standard rate of 70% whereas currently TSLA has a special rate of 35% and NKLA is ineligible. It sounds like this means that 70% of the value invested in AAPL that is pledged as collateral would be eligible. Turning this into a formula would look like `0.2 * T = P * R` (where `T` is the total value of the mortgage, P is the pledged asset, and R is the advance rate of the pledged asset). For AAPL a \$100k pledged investment is needed for a \$350k mortgage, and for a more risky investment like TSLA a \$200k of pledged assets would be needed.

Following this logic, if I have multiple pledged assets and a down payment, would that formula instead look like `0.2 * T = P1 * R1 + P2 * R2 + D` (where P1 is asset 1, P2 is asset 2, and D is the down payment)? As a real world example, if I have a \$350k mortgage and \$50k in TSLA and \$25k in AAPL that would mean instead of the original \$70k down payment to avoid PMI, only a \$35k down payment would be needed up front.

Is this the right logic? If not, could someone provide guidance or additional information?

• The math looks right. What concerns me is, "Once the loan is paid off and the debt is fully satisfied, the lender transfers the pledged asset back to the borrower." That seems to mean that you'll be stuck holding those assets for however many years it takes to pay off the whole loan, not just get to 20% equity. Dec 7, 2020 at 9:53
• @RonJohn With a release clause, the transfer of the equities back to the borrower should be able to be negotiated (ie. after 20% of the property value is paid and a re-appraisal is completed). I would definitely make sure not to get a PAM without this. In addition according to the Schwab FAQ and everywhere else I've seen, decisions on investments are made by the borrower and the limitations of trading typically only involve margin, payment, or option trading features, or ineligible securities such as NKLA. I partake in none of these. Dec 7, 2020 at 22:35

The basic math in your question regarding how much in stock you would have to pledge is superficially correct. What is missing are the actual rules regarding these types of loans.

I went to https://www.schwab.com/pledged-asset-line to see the details One thing that became clear is that this is a line of credit that is targeted at people who are faced with selling shares and paying a big tax bill in order afford something else.

things that jumped out at me:

``````Loan Value Of Collateral at Origination |Index         |Interest Rate Spread
\$100,000 to <\$250,000                   |1-month LIBOR | 4.50%
``````

That means the minimum amount is \$100K, and the interest rate will be similar to what most banks will charge for the 20% when setting up a 80-20 loan.

Flexible. Line amounts from \$100,000 (required minimum initial advance of \$70,000).

But don't get attached to that interest rate:

Schwab Bank reserves the right to change any part of the interest rate after the Pledged Asset Line is established, including the LIBOR reference rate, interest rate spread, or post-demand spread.

The faq has more details:

What are the risks?

``````Entering into a Pledged Asset Line and pledging securities as collateral
``````

involve a high degree of risk. At any time, including in the event that the loan value of collateral is insufficient to satisfy the minimum loan value of collateral or to support the outstanding loans, Schwab Bank may demand immediate payment of all or any portion of the outstanding obligations, or require additional cash or securities to be added to the Pledged Account maintained at Charles Schwab & Co., Inc.

``````If a Demand is not addressed, the pledged securities may be immediately
``````

liquidated without further notice to you, which may result in tax consequences.

That means that they still might sell your pledged assets.

What is unanswered is how this line of credit will impact your ability to qualify for the main mortgage. The lender will consider this line of credit and any required payments when looking at your whole financial picture.