What is a Pledged Account Mortgage (PAM)?
A Pledged Account Mortgage (PAM) is an innovative home purchase loan designed to make mortgage payments more manageable, especially during the initial years of repayment. In this arrangement, a sum of cash contributed by the homebuyer is set aside in a special account that is pledged to the lender. This pledged account is then gradually drawn down to supplement the mortgage payments at the start of the loan term, helping to reduce the financial burden during those early years.
How It Works
At the outset, the homebuyer contributes a down payment, a portion of which is allocated into a pledged account. This account is tied to the mortgage and used to offset mortgage payments for a specified period. Typically, this setup allows for lower payment amounts initially, which can be especially beneficial for those who are just getting their finances in order or anticipating an increase in income in the near future.
An Improved Example
Consider John who seeks to buy a new home using a Pledged Account Mortgage. The loan principal for the home is $300,000. John makes a substantial down payment of $60,000, deciding to allocate $20,000 of this amount into a pledged account. Over the first three years, John makes payments based on a mortgage principal of $320,000. However, during these initial years, his payments are effectively reduced because of the pledged account, which is drawn down by his lender to ease John’s financial load.
Benefits of a Pledged Account Mortgage
- Lower Initial Payments: Helps borrowers manage early-stage mortgage payments
- Flexibility: Enables customization of the down payment to balance current cash flow needs
- Improved Affordability: Reduces financial strain, making home ownership more attainable
Comparison with Other Mortgage Types
Graduated Payment Mortgage: Similar in the sense that initial payments are lower, but GAPM accomplishes this through a gradual increase in payments over time based on a predefined schedule, rather than utilizing a separate account to offset costs.
Collateral: Traditional collateral involves putting up assets to secure a loan, which might not provide the same early-payment relief as a PAM.
Frequently Asked Questions
1. How long do the funds in the pledged account typically last? Standard timeframes for using the pledged account range between 1 to 3 years, depending on the terms set by the lender.
2. Can I adjust the amount in the pledged account after the mortgage terms are set? Generally, the initially agreed-upon amount remains fixed; lenders usually don’t permit adjustments once the term begins.
3. Will my interest rates be higher if I choose a Pledged Account Mortgage? Not necessarily. Interest rates can be comparable to other mortgage options but depend largely on market conditions and individual lender policies.
Conclusion
A Pledged Account Mortgage (PAM) offers a strategic pathway to homeownership that can be tailored to ease the financial strain during the initial repayment years. By creating a pledged account to supplement your mortgage payments, you gain flexibility and relief, making it an attractive choice for new buyers looking to manage their finances more effectively.
Related Terms: Graduated Payment Mortgage, Collateral, Down Payment, Loan Principal.
