Homeowners pull equity from home to invest

Mortgage adviser: Shawn Sidhu. Property type: Singlefamily home in San Jose. Appraisal value: $1.050 million. Loan type: 5-1 ARM interest only. Rate: 3.375 percent lender gave half a point toward closing cost credit. Loan amount: $768,000. Backstory: Sidhu’s clients wanted to funnel more cash into their investments, so they looked to their home for equity.

They purchased the residence about a year ago and don’t plan on living there long-term. Since they don’t intend to be tied to the property, the couple opted for an interest-only adjustable rate mortgage.

Because the financing comes from a portfolio loan, the borrowers are somewhat insulated from fluctuations in the mortgage market. The loans aren’t governed by Fannie Mae or Freddie Mac, and the terms are fixed for five years.

Such a loan is tailored to someone who won’t be in the home long term and will have equity to invest. The borrowers take the savings from principal and interest payments and put it toward their assets.

This type of loan requires a large amount of equity. Lenders want the loan-to-value ratio to be 80 percent or lower, so borrowers have some skin in the game.

This loan isn’t for everyone. Lenders want clients to have at least a year’s worth of reserves in order to make payments. A client’s credit score must also be higher than 740.

While this isn’t a program for someone who wants to spend decade after decade in their home, the aggressive lending appeals to those who want cash in the short term and expect to cover their costs upon selling the house in a handful of years.