Home Down Payment & Margin Borrowing

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InvestmentNewbee
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Joined: Wed Dec 10, 2014 4:23 pm

Home Down Payment & Margin Borrowing

Post by InvestmentNewbee »

Hi There,
Question for folks on whether or not this seems like a reasonable thing to do.

We are currently looking at properties as our family is growing and we are looking to move closer to grandparents. We currently own a home but for a variety of reasons (competitive market, timing etc.) don't want to make a home purchase contingent on selling our current home. This means we need to come up with the down payment money.

I was considering borrowing against our brokerage account on margin for whatever portion of the down payment we can't come up with through cashflow over the next few months. We use Vanguard as a brokerage and the rate that I have been able to come up with looks to be about 5%. Curious as to what I might be missing. It seems that carrying a loan on margin for a few months while we sell our house at the interest rate and then paying it all off immediately with the home sale proceeds is a much better option than taking the LTCG hit we would see selling stock out of our brokerage.

Happy to answer any questions that would help to think this through further. I feel like I must be missing something here but can't seem to come up with why this wouldn't be a good strategy.

For reference we would be looking at probably 10-20% of our investment portfolio for the loan.
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cchrissyy
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Re: Home Down Payment & Margin Borrowing

Post by cchrissyy »

if the loan was going to be longer term, there are cheaper rates at other brokerages

if the loan was a larger portion of your collateral value, there would be appreciable risk of a crash and forced sale

but in your case, i don't see a problem
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David Jay
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Re: Home Down Payment & Margin Borrowing

Post by David Jay »

Generally lenders want to know the source of the down payment. "I borrowed it" is generally not a great answer, check with your lender.
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harikaried
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Re: Home Down Payment & Margin Borrowing

Post by harikaried »

InvestmentNewbee wrote: Wed Sep 22, 2021 2:03 pmmuch better option than taking the LTCG hit we would see selling stock out of our brokerage
Are there any positions with losses or relatively small gains that you could sell to reduce the margin loan balance? Indeed a relatively short term loan at 5% for say $100k is $1250 interest over 3 months vs say $50k basis and $50k gains requiring $7.5k capital gains tax.

Additionally, if you can take a 401k loan for $50k, the actual cost is mostly any loan setup fees and future tax on repaid interest, which should be pretty small given the quick repayment from home sale proceeds. This could help reduce the size of the margin loan balance if you want to reduce some interest cost.
daheld
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Re: Home Down Payment & Margin Borrowing

Post by daheld »

I think it would be helpful to know what percentage you'll be able to put down at first and what percentage you hope to put down total. Are you able to put anything at all down?

To me, if you can put enough down to qualify for a mortgage, I say put a small down payment at first, sell your current home, then make a lump sum payment against the principle to eliminate P&I.
deikel
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Re: Home Down Payment & Margin Borrowing

Post by deikel »

borrowing on margin seems a pretty crazy idea to me.... [off-topic comments removed by admin alex]

How about a HELOC on your current home instead, pull on that credit for the down payment ? That is done by many and should not raise any flags to your second lender
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Topic Author
InvestmentNewbee
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Re: Home Down Payment & Margin Borrowing

Post by InvestmentNewbee »

daheld wrote: Wed Sep 22, 2021 3:01 pm I think it would be helpful to know what percentage you'll be able to put down at first and what percentage you hope to put down total. Are you able to put anything at all down?

To me, if you can put enough down to qualify for a mortgage, I say put a small down payment at first, sell your current home, then make a lump sum payment against the principle to eliminate P&I.
We would need to put down 25% to qualify for the top interest rates given the home prices we are looking at. That is the primary factor for needing to come up with the dough. I don't think that we could put down less than 20% and still qualify for the loan amount we are talking about. I could be wrong though and will ask a broker.
Topic Author
InvestmentNewbee
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Re: Home Down Payment & Margin Borrowing

Post by InvestmentNewbee »

harikaried wrote: Wed Sep 22, 2021 2:32 pm
InvestmentNewbee wrote: Wed Sep 22, 2021 2:03 pmmuch better option than taking the LTCG hit we would see selling stock out of our brokerage
Are there any positions with losses or relatively small gains that you could sell to reduce the margin loan balance? Indeed a relatively short term loan at 5% for say $100k is $1250 interest over 3 months vs say $50k basis and $50k gains requiring $7.5k capital gains tax.

Additionally, if you can take a 401k loan for $50k, the actual cost is mostly any loan setup fees and future tax on repaid interest, which should be pretty small given the quick repayment from home sale proceeds. This could help reduce the size of the margin loan balance if you want to reduce some interest cost.
Didn't even think of the 401k idea. That is a good call.
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InvestmentNewbee
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Re: Home Down Payment & Margin Borrowing

Post by InvestmentNewbee »

David Jay wrote: Wed Sep 22, 2021 2:23 pm Generally lenders want to know the source of the down payment. "I borrowed it" is generally not a great answer, check with your lender.
Just talked to my broker. They don't care at all where the money came from as long as its valid and traceable. They would simply factor any monthly payment into a DTI calculation. They actually said this is not an entirely uncommon approach which made me a little more confident.
Goal33
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Re: Home Down Payment & Margin Borrowing

Post by Goal33 »

Your plan is reasonable.

In my case, did something similar. Nothing to do with selling house first or not... just didn't want to sell stock (and pay taxes) to come up with the downpayment. I went for a 401k loan for both of us... which was boosted to 100k max due to covid. Paid it back after a year. Worked out great. Another option I considered was margin loan like you mentioned considering. It's also a good plan.

FYI, neither the 401k loan or the margin loan will count in your Debt to Income.

Margin loans and 401k loans are not the devil people make them out to be, you're going to get a lot of negative reaction from folks about it. I consider them another tool in the toolbox.

Good luck, let us know how you think through it.
jarjarM
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Re: Home Down Payment & Margin Borrowing

Post by jarjarM »

5% would be too high but if you can move it to another brokerage firm and negotiate the rate down to 1.2-1.3% and a bit of bonus, that probably is the more prefer way to do. Also, look at relationship discount for your loan, it can be substantial.
sureshoe
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Re: Home Down Payment & Margin Borrowing

Post by sureshoe »

InvestmentNewbee wrote: Wed Sep 22, 2021 3:18 pm
daheld wrote: Wed Sep 22, 2021 3:01 pm I think it would be helpful to know what percentage you'll be able to put down at first and what percentage you hope to put down total. Are you able to put anything at all down?

To me, if you can put enough down to qualify for a mortgage, I say put a small down payment at first, sell your current home, then make a lump sum payment against the principle to eliminate P&I.
We would need to put down 25% to qualify for the top interest rates given the home prices we are looking at. That is the primary factor for needing to come up with the dough. I don't think that we could put down less than 20% and still qualify for the loan amount we are talking about. I could be wrong though and will ask a broker.
You can get a great loan rate at 15% I believe. Check Better.com and some of those sites.

A bridge loan may be an option.
deltaneutral83
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Re: Home Down Payment & Margin Borrowing

Post by deltaneutral83 »

jarjarM wrote: Wed Sep 22, 2021 3:57 pm 5% would be too high but if you can move it to another brokerage firm and negotiate the rate down to 1.2-1.3% and a bit of bonus, that probably is the more prefer way to do. Also, look at relationship discount for your loan, it can be substantial.
I think IB is the only brokerage that can touch 1.2-1.3% and you may have to have had the account at IB for 90 days before you qualify for this and other bennies they offer (i'd get with someone who has used margin at IB and can tell you everything). The problem on a 5% margin loan that you plan to take 60 days is that it turns into a longer time frame. If you're only taking out 30% of your portfolio you should be able to weather any storm in the market. We've seen several threads on margin loans to avoid two mortgages. In fact, if you can keep it to 30% of your portfolio, you're probably best to keep the margin rate, although the terms are certainly less favorable than a fixed rate which the OP can probably get for 2% and no points for 15 years on a mortgage.
jarjarM
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Re: Home Down Payment & Margin Borrowing

Post by jarjarM »

deltaneutral83 wrote: Thu Sep 23, 2021 8:36 am
jarjarM wrote: Wed Sep 22, 2021 3:57 pm 5% would be too high but if you can move it to another brokerage firm and negotiate the rate down to 1.2-1.3% and a bit of bonus, that probably is the more prefer way to do. Also, look at relationship discount for your loan, it can be substantial.
I think IB is the only brokerage that can touch 1.2-1.3% and you may have to have had the account at IB for 90 days before you qualify for this and other bennies they offer (i'd get with someone who has used margin at IB and can tell you everything). The problem on a 5% margin loan that you plan to take 60 days is that it turns into a longer time frame. If you're only taking out 30% of your portfolio you should be able to weather any storm in the market. We've seen several threads on margin loans to avoid two mortgages. In fact, if you can keep it to 30% of your portfolio, you're probably best to keep the margin rate, although the terms are certainly less favorable than a fixed rate which the OP can probably get for 2% and no points for 15 years on a mortgage.
There are many posters who were able to negotiate for 1.2%-1.3% margin rate by using IB as comparison and move substantial (>$1mil) asset over to Schwab and fidelity. Also, one can take out pledge asset loan (PAL) with securities as collateral, the rate varies dependent on asset amount but I know for a fact that schwab is able to offer 1.2-1.3% on that (assuming again there's > $1mil). This is a method to avoid incurring LG and use future cashflow to cover immediate needs.
deltaneutral83
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Re: Home Down Payment & Margin Borrowing

Post by deltaneutral83 »

jarjarM wrote: Thu Sep 23, 2021 12:58 pm
There are many posters who were able to negotiate for 1.2%-1.3% margin rate by using IB as comparison and move substantial (>$1mil) asset over to Schwab and fidelity. Also, one can take out pledge asset loan (PAL) with securities as collateral, the rate varies dependent on asset amount but I know for a fact that schwab is able to offer 1.2-1.3% on that (assuming again there's > $1mil). This is a method to avoid incurring LG and use future cashflow to cover immediate needs.
Are the terms on margin loans pretty similar across the board, for example, if one is able to negotiate down to 1.2-1.3% on margin with Schwab, do they have the same terms as IB? I know margin loans are a totally different animal and the rates can change and you can have a call most anytime (not that it's likely if you're under 60 LTV?) but I would assume you've had a good experience with Schwab margin loan ?
calwatch
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Re: Home Down Payment & Margin Borrowing

Post by calwatch »

The other option, if you feel comfortable with it, is a box spread on the assets for a very low rate (0.55% for a $30,000 one I sold Monday). There is a thread discussing it: viewtopic.php?f=10&t=344667
jarjarM
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Re: Home Down Payment & Margin Borrowing

Post by jarjarM »

deltaneutral83 wrote: Thu Sep 23, 2021 1:49 pm
jarjarM wrote: Thu Sep 23, 2021 12:58 pm
There are many posters who were able to negotiate for 1.2%-1.3% margin rate by using IB as comparison and move substantial (>$1mil) asset over to Schwab and fidelity. Also, one can take out pledge asset loan (PAL) with securities as collateral, the rate varies dependent on asset amount but I know for a fact that schwab is able to offer 1.2-1.3% on that (assuming again there's > $1mil). This is a method to avoid incurring LG and use future cashflow to cover immediate needs.
Are the terms on margin loans pretty similar across the board, for example, if one is able to negotiate down to 1.2-1.3% on margin with Schwab, do they have the same terms as IB? I know margin loans are a totally different animal and the rates can change and you can have a call most anytime (not that it's likely if you're under 60 LTV?) but I would assume you've had a good experience with Schwab margin loan ?
Rate is essentially based on LIBOR or SOFR so as long as those rates don't make dramatic moves in short time, margin rate will be relatively stable. As to margin requirement, it's usually spell out very clearly in the doc (depending on brokerage firm and setup) and have curtesy alert before liquidation (again dependent on brokerage).
harikaried
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Re: Home Down Payment & Margin Borrowing

Post by harikaried »

InvestmentNewbee wrote: Wed Sep 22, 2021 2:03 pmWe use Vanguard as a brokerage and the rate that I have been able to come up with looks to be about 5%
How much would you need to borrow on margin for the downpayment? $100k @ 5% for one year is $5k interest, so being able to borrow at IBKR's current 1.08% (with public referral link dropping the first tier's rate from 1.58% to 1.08%) costs $1080 in interest saving about $4k. If you only borrow for 6 months, then cut that savings in half.

Alternatively, you could also combine this with a transfer bonus, e.g., I believe IBKR offers $1k (in $IBKR shares after 1 year) for transferring $100k, so even if you repay the margin loan in 3 months, Vanguard would have cost $1250 interest while IBKR pays you $1k bonus and charges $395 interest for a net earnings of $605 -- nearly $2k savings compared to Vanguard.
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