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Asset-backed mortgage - thoughts vs. using a 15 or 30 year fixed.

I have to possibility of using an asset-backed mortgage through Morgan Stanley to purchase a new tract house.

The advantage for doing this is that I use existing assets (stocks) to pledge towards my downpayment.  (I basically would have to pledge 2.5x times the down payment).  I'm not planning to withdraw the money anytime some from the investment accounts anyways.   This would allow me to continue to use that money as an investment rather than putting the money towards the house.

The mortgage type they are pushing me toward is a 10 year interest only ARM that gets converted to a 20 year fixed at the 10 year mark.  There would also be a balloon payment due at the 10 year mark for any unpaid principal for the initial time payment.  Making the principal payments would not be an issue.

The biggest that I see is interest rates rising dramatically.  At that point, I would most likely would need to pay off the loan or refinance into a traditional 15/30 year fixed.  The second largest risk is if the Market tumbles even more dramatically than 2008-2009.

The upside is that most likely, I would most likely out-earn the 3.2% interest rate in the investments. 

Any thoughts?  other risks that I am missing?
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May 29 - US
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Answers (2)

Is 100% of your down payment "asset based" or just a portion of it? We have 1 investor whom requires 10% down, then the difference between their financed amount and your down payment is "pledged as collateral". If you're still putting some money into your down payment, then there are still a lot of programs available that may still help you to buy your home with a low down payment (without disturbing your investments). What state are you looking to buy? And what is your price range?
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If you're pledging 2.5x the amount of down payment, no wonder you'd be out earning the 3.2% interest rate. Put the actual down payment, and look at the forecasted appreciation of the home you are buying and compare the percentage of appreciation over the span of 10 years. What about if you have an opportunity to leverage your future equity for investments. 

You can get that 3.2% interest rate on a conventional loan, lock in the rate, avoid the balloon payment and even locking in the 2.5x down payment as collateral.

 This is my initial basic response to your post. With more information I'd be inclined to go more into depth. 
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