And don’t forget, while the rates on margin loans or securities-backed lines of credit are lower than those for a 30-year mortgage as of now, they typically are variable rates, meaning they will fluctuate with the market.
That’s why the smartest play is to use an investment portfolio as a means to an end, in effect a bridge from the sale of one home to the purchase of another. And then after the home sale is complete, pay off the margin loan or securities-backed line of credit and take out a more traditional mortgage.
Still, given the uncertain economic environment, you’ll want to be conservative. Firms will typically allow borrowers to tap up to 50% of the market value of their account, but sticking closer to 30% will give you more of a cushion to play it safe. Likewise, if you are banking on selling your home to pay off the margin loan, be realistic about what your home can sell for if the market continues to cool.
Jim Miller, a certified financial planner in Chapel Hill, North Carolina, suggests that margin-loan holders check rates quarterly — once the rate on a fixed mortgage becomes comparable to the margin loan, it’s time to make the switch. In the interim, make sure you have a budget in place to pay it down, Miller says.
If you do borrow against your investment portfolio, remember that the interest you pay for a margin loan generally isn’t fully tax-deductible. You can only deduct that interest against any investment income you earn. With a traditional mortgage, you can deduct all the interest for loans up to $750,000 if you itemize your deductions.
Margin loans have a bad rap for getting reckless borrowers into hot water. But if used carefully, they’re a wise way for some homebuyers to become all cash-buyers, at least temporarily.
Alexis Leondis is a Bloomberg Opinion columnist covering personal finance. Previously, she oversaw tax coverage for Bloomberg News.