Have you ever considered borrowing on your investments otherwise known as borrowing on the margin ? Would you ever consider using a margin loan to buy a home?
What is a margin loan?
A margin loan is borrowing against the value of your stocks, bonds or mutual funds. Individual brokerages will decide which of these they are willing to loan on and what percentage. Typically, securities that are traded on major US stock exchanges and sell for at least five dollars per share are allowed. Funds in retirement accounts or 401ks are not. Many brokerages allow loan amounts up to approximately 50% of the value of your portfolio but this is at their discretion.
When does a margin loan make financial sense?
Life in the real estate world, can move pretty fast. In times of a low inventory market there can be a lot of competition for the same property. A margin-loan can be a speedy, short-term alternative to a traditional loan. What often happens is a client will take the margin loan and then after the home purchase closes will apply for a mortgage.
Similar to a pledged asset loan, margin loans do have some pricing advantages as compared to a home loan with a cash down payment. Margin loans may also have tax benefits* as interest on a margin loan is generally tax deductible.
Additionally, borrowing on margin against the value of your stock portfolio means that those funds don’t need to be liquidated. Therefore, if you’ve had substantial growth on those assets you can avoid paying capital gains tax*. So using the margin loan in this respect is a huge financial benefit. We’ve had clients use a margin loan simply to cover their cash to close. They still use a traditional loan to get the benefits of the low-interest rate environment that we are currently in, while deferring taxes* on the money invested.
If you have questions about purchasing a home with a margin loan, send us a message or call today.