How can we come up with a real estate down payment without selling our stock?
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This is a delightful problem. A home purchase typically requires either a sizable down payment, say 20 percent, or some form of backing by a third-party — perhaps the FHA, VA, or a private mortgage insurance (MI) company — to buy with less down. With a third-party, loans with 15, 10, 5, 3 and even nothing down are possible.
So, one choice is to look for financing with as little down as possible. A second choice is to look at RAM financing — a reserve account mortgage.
With a RAM loan you might get 100 percent financing. At the same time, you would deposit an asset with the lender — say the stock you do not want to sell.
The lender then holds onto the stock until the property has a certain level of equity caused by loan amortization (reducing the size of the loan through payments) and, hopefully, increasing property values. The borrower has 100 percent financing.
RAM financing raises important questions: Who gets the interest on the account? What if the value of the securities declines? What is the monthly loan payment compared with financing that requires a downpayment? When is the stock returned to the owner? Is all interest deductible? Etc.
Mortgage lenders, tax professionals, and securities brokers can provide additional information. RAM financing arrangements should be reviewed by your attorney before acceptance.
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