Borrowing against portfolio for home down payment

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jakobox
Posts: 17
Joined: Sun Apr 05, 2015 6:33 pm

Borrowing against portfolio for home down payment

Post by jakobox » Sun Nov 12, 2017 6:34 pm

Hi all, I'm contemplating something and would love some Boglehead advice.

I'm looking at a home purchase. The total downpayment is less than half what I have invested in non-retirement accounts, and has significant unrealized gains. I would like the down payment to ultimately come from these accounts.

A 10 percent payment will be due upon the accepted contract. After that, there are still a number of contingencies, including inspection appraisal etc.

I am exploring options for borrowing against my portfolio for the down payment. My thought process is that if the home sale doesn't go through for any reason, that will help me avoid realizing any taxable gains on the portfolio.

The 2 scenarios are

a) Home sale goes through. I would immediately sell stocks to match, and cover the amount borrowed
b) Home sale does not go through. The down payment would be returned and I would cover the loan.

I've tried to do some research, and don't see people talking about/doing this very often. Would love to hear your thoughts on this. Additionally, if you think this is a smart approach, any advice on how I would go about doing this with my Vanguard account.

Thank you!

Jake

TravelforFun
Posts: 843
Joined: Tue Dec 04, 2012 11:05 pm

Re: Borrowing against portfolio for home down payment

Post by TravelforFun » Sun Nov 12, 2017 6:51 pm

If I'm sure I will buy a house during the next few months and want use money in my taxable accounts, I would sell the stocks now and keep the money in a saving account.

TravelgorFun

Uniballer
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Joined: Thu Apr 20, 2017 9:55 am

Re: Borrowing against portfolio for home down payment

Post by Uniballer » Sun Nov 12, 2017 6:54 pm

I was under the impression that part of the reason for PMI below 20% down payment is that you have no "skin in the game", and are more likely to walk away (AKA default). I can't imagine a mortgage lender looking at you with a loan for the down payment as equivalent to somebody who had it in cash. Sure, you intend to *have* it in cash, but that is after the mortgage note is set up...

Besides, if you are serious about buying a house, won't you simply find another one to buy if the first one falls through? Why do the work to set up this loan, and pay interest on it, when you will be selling investments soon to cover it anyway?

CurlyDave
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Joined: Thu Jul 28, 2016 11:37 am

Re: Borrowing against portfolio for home down payment

Post by CurlyDave » Sun Nov 12, 2017 8:56 pm

jakobox wrote:
Sun Nov 12, 2017 6:34 pm
... Additionally, if you think this is a smart approach, any advice on how I would go about doing this with my Vanguard account.
You should be able to convert your account to a margin account just by filling out a form. You can withdraw money from a margin account without selling anything, up to the margin limit of the account. This is not a taxable event.

In general, small amounts of margin, up to about 20% of the total account value are not very dangerous. More than that and the danger of a margin call increases if the value of your equities declines. A margin call can be very, very bad.

If you have a margin account, your brokerage statement will list the net value of your account, which is total equities minus margin loans. Many lenders will not put a margin loan in the same class as a regular loan, since there are really no monthly payments due on it. They will just consider the account to have a net value equal to the stated net value.

There is interest due on a margin loan, that is usually charged monthly, frequently by increasing the balance due on the loan. Any cash that comes into the account (deposits, dividends, sales proceeds, etc.) first goes into paying down the margin loan and then into a cash balance one the loan is completely satisfied.

Others may disagree, but I think this is a excellent way to put down that first 10% to get your foot in the door. If the real estate transaction falls through, you will get your deposit back and you can pay off the margin loan. You will owe a little bit of interest, but it is a cheap way to raise a sizable, short-term lump sum. Especially if the transaction does not go through. Since you never sold the shares, there is no capital gains tax. If the transaction does complete, sell the shares and take your capital gains lumps.

* * * * * * * * * * *

Talk to someone knowledgable about margin, its uses and its dangers before doing this.

Personally, I have done this in the past and would do it again in a heartbeat for the right real estate transaction. But, my financial situation may be very different from yours, and I have held margin-enabled accounts for over 30 years. Please note, I did not say that I have had outstanding margin loans for that long, only that my taxable accounts have been margin-enabled.

It costs nothing to margin-enable a taxable account and there can be significant advantages.

Caduceus
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Re: Borrowing against portfolio for home down payment

Post by Caduceus » Mon Nov 13, 2017 5:10 am

What is the interest rate you would incur on borrowing against your account, and how long do you envision having to borrow this money for until you either cover the loan or decide to sell it?

It doesn't seem like such a great idea to me, because you have to pay the interest rate on the loan, in addition to capital gains, should the home loan go through.

AlohaJoe
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Location: Saigon, Vietnam

Re: Borrowing against portfolio for home down payment

Post by AlohaJoe » Mon Nov 13, 2017 5:36 am

The margin rates at Vanguard are very high. I think over 7% the last time I looked. Moving assets to a new brokerage takes time, so you'd need to factor that in.

(edit: the actual rates https://investor.vanguard.com/investing/margin)

First I would make sure that your mortgage lender is okay with this plan. My understanding was that most mortgage lenders ask you "did any part of the down payment come from a loan?"

I think your plan is okay-ish -- though "the total downpayment is less than half what I have invested in non-retirement accounts" covers a lot of ground. Is that 48%? Or 20%?

jakobox
Posts: 17
Joined: Sun Apr 05, 2015 6:33 pm

Re: Borrowing against portfolio for home down payment

Post by jakobox » Mon Nov 13, 2017 10:27 am

Caduceus wrote:
Mon Nov 13, 2017 5:10 am
It doesn't seem like such a great idea to me, because you have to pay the interest rate on the loan, in addition to capital gains, should the home loan go through.
Yes, that is definitely what I would anticipate. I am trying to protect against the reverse though: Should the home sale NOT go through, I would be paying capital gains on investments that would be going straight back into the market.
AlohaJoe wrote:
Mon Nov 13, 2017 5:36 am
I think your plan is okay-ish -- though "the total downpayment is less than half what I have invested in non-retirement accounts" covers a lot of ground. Is that 48%? Or 20%?
About 35 percent of total account value.
AlohaJoe wrote:
Mon Nov 13, 2017 5:36 am
First I would make sure that your mortgage lender is okay with this plan. My understanding was that most mortgage lenders ask you "did any part of the down payment come from a loan?"
Yes, 100 percent good point. First I wanted to see if the Boggleheads were okay with it :P (or at least think through it more in depth with some feedback) .. If I go this route, the lender would be the next person to ask.
Uniballer wrote:
Sun Nov 12, 2017 6:54 pm
Besides, if you are serious about buying a house, won't you simply find another one to buy if the first one falls through? Why do the work to set up this loan, and pay interest on it, when you will be selling investments soon to cover it anyway?
Totally understand your viewpoint. In our case, this is actually not the case. We already own a home in the neighborhood. The potential purchase is more of a one-of-a-kind find, and if we don't close on this house, I could easily envision us staying in our current home for many years. (also game plan would be to rent out our current home if we do close on the new one)
Caduceus wrote:
Mon Nov 13, 2017 5:10 am
What is the interest rate you would incur on borrowing against your account, and how long do you envision having to borrow this money for until you either cover the loan or decide to sell it?

It doesn't seem like such a great idea to me, because you have to pay the interest rate on the loan, in addition to capital gains, should the home loan go through.
From the links that other have shared (thanks all!), it looks like 6 to 7 percent APY. Not sure based on the Vanguard website.. I'm guessing there may be additional fees to anticipate as well. The maximum term of the loan would be from initial down payment to the day after closing on the home, which I anticipate being 4-5 months.

I'm digging around a bit more on the Vanguard page, and it seems that there would be potential to take about half the loan from a 401K account. I'm curious whether interest rates on that would differ for any reason (unfortunately their loan calulator page seems to be down at the moment).

spacecadet610
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Joined: Sun Aug 26, 2012 1:41 pm

Re: Borrowing against portfolio for home down payment

Post by spacecadet610 » Mon Nov 13, 2017 8:34 pm

Check out Interactive Brokers, you can transfer your Vanguard ETFs over and borrow on margin at less than 2.5% interest.

It's what I plan on doing for home down payment. I have the assets for the downpayment but why pay more than 20% long term gain taxes when I can get a 2.5 loan.

jakobox
Posts: 17
Joined: Sun Apr 05, 2015 6:33 pm

Re: Borrowing against portfolio for home down payment

Post by jakobox » Tue Nov 14, 2017 7:26 pm

Thanks for the tip, Spacecadet! Will check them out.

grettman
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Re: Borrowing against portfolio for home down payment

Post by grettman » Tue Nov 14, 2017 7:39 pm

You are getting good advice here. I would only offer --- do you have all of your bases covered (emergency fund, retirement accounts, and etc.)? Just because you can do what you want to do, it doesn't mean you should? I assume you have done all of this thinking but just want to check. Last thing you want to do is to find yourself in a new house only to have little money left over in case something goes wrong (and when you don't have money, it seems everything that can go wrong does).

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Watty
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Re: Borrowing against portfolio for home down payment

Post by Watty » Tue Nov 14, 2017 7:55 pm

+1 on clearing this with your lender.

I would not do it though. There is a non-zero chance that between the time you get the loan and when you actually sell the stocks that the stocks could drop a lot in price. This is especially a risk if you have individual stocks and not a mutual fund.

Even if you don't get this house it is likely that you will buy one in the near future so that money should be in something more conservative than the stock market.

jakobox
Posts: 17
Joined: Sun Apr 05, 2015 6:33 pm

Re: Borrowing against portfolio for home down payment

Post by jakobox » Wed Nov 15, 2017 4:47 pm

grettman wrote:
Tue Nov 14, 2017 7:39 pm
You are getting good advice here. I would only offer --- do you have all of your bases covered (emergency fund, retirement accounts, and etc.)? Just because you can do what you want to do, it doesn't mean you should? I assume you have done all of this thinking but just want to check. Last thing you want to do is to find yourself in a new house only to have little money left over in case something goes wrong (and when you don't have money, it seems everything that can go wrong does).
Great point. This is all doable without touching my emergency fund or retirement accounts.

This is money that has been invested and accumulating for exactly a purchase like this... Now that it's *hopefully* on the horizon I'm just trying to be smart and tax efficient.

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