Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Line of Credit backed by investments
Old 05-07-2016, 06:55 PM   #1
Recycles dryer sheets
 
Join Date: Feb 2016
Posts: 63
Line of Credit backed by investments

Somewhat new here still so please refer me to the right threads if this is a common one.

So our ER/lifestyle goals have taken us to a place where it makes sense to move to a more expensive home for a 10-year horizon. Huge lifestyle improvement.

Cutting to the basics target home is around 1.5m, we can pay cash but figured put 50% down on a 7/1 arm or so given today's rates.

Much to my surprise we don't qualify for that amount of mortgage despite perfect credit forever and liquid assets exceeding the loan by multiples. Guess mortgage rules have changed in the last 20 years.

So lets forget about mortgages then, we happen to have access to a libor indexed, interest only open line of credit, backed by our investment account in a specific bank. This is more of a privileged product by its nature.

Ok, so with that baseline:

This is an interest-only loan, no term, no floors or ceilings because it is a simple index, month to month. No mortgage help in terms of taxes, although tax guy says interest payments are good offsets for gains, so nice advantage.

Then my question:

Knowing that we can pay this in full anytime (as in LIBOR goes nuts) by taking away from investments (hopefully at a higher rate), is there any reason to pay this down or just keep it forever, until libor / returns turn then pay it off in full?

Given the tax advantage, current rates my logic says to let it ride indefinitely.
__________________

__________________
DanP is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 05-07-2016, 10:20 PM   #2
Recycles dryer sheets
robertf57's Avatar
 
Join Date: Jun 2014
Posts: 329
Why wouldn't you seek a smaller mortgage that locks in a rate for at least some timeframe (7/1 ARM if that is your desire, or even a fixed 15 given current rates) and gives you the deductibility?


Sent from my iPad using Early Retirement Forum
__________________

__________________
robertf57 is offline   Reply With Quote
Old 05-07-2016, 11:10 PM   #3
Recycles dryer sheets
 
Join Date: Feb 2016
Posts: 63
Thought of that but the LOC was so much cheaper and tax-wise it seems even better than mortgage deductibility, as it is offset as investment costs. Some carry-over benefits too.

The question now is more as to should I roll this monthly interest indefinitely, or pay it down?

And as I type I realize this may not be such an ordinary situation to begin with.
__________________
DanP is offline   Reply With Quote
Old 05-08-2016, 12:09 AM   #4
Thinks s/he gets paid by the post
Senator's Avatar
 
Join Date: Feb 2014
Location: Eagan, MN
Posts: 3,053
I know several people that use interest only loans. Most, if not all, could qualify for a 30-year loan as well. Interest only loans have their place.

It seem that a bank will not qualify you for a mortgage, based on the parameters that you gave them. They have a lot of history, and make a lot of money making loans. They WANT to give you a loan, but the risk was greater than the perceived benefit.

If you use an interest only loan, pay interest only. That is the purpose of the loan.
__________________
FIRE no later than 7/5/2016 at 56 (done), securing '16 401K match (done), getting '15 401K match (done), LTI Bonus (done), Perf bonus (done), maxing out 401K (done), picking up 1,000 hours to get another year of pension (done), July 1st benefits (vacation day, healthcare) (done), July 4th holiday. 0 days left. (done) OFFICIALLY RETIRED 7/5/2016!!
Senator is offline   Reply With Quote
Old 05-08-2016, 07:55 AM   #5
Recycles dryer sheets
 
Join Date: Feb 2016
Posts: 63
Thanks Senator. Seems that the newer mortgage rules are very strict, in my particular case the limiter was income (counting salary only, could not count investment income unless I withdrew it regularly) plus the fact that I did not want to make selling my current home contingent. With that formula the mortgage I qualified for was < 500k, not worth the hassle.

So one could treat the LOC as a mortgage paying it down monthly or just interest only until there is a reason to pay it off. Curious about your statement about paying interest only, why?
__________________
DanP is offline   Reply With Quote
Old 05-08-2016, 08:01 AM   #6
Thinks s/he gets paid by the post
Senator's Avatar
 
Join Date: Feb 2014
Location: Eagan, MN
Posts: 3,053
Quote:
Originally Posted by DanP View Post
Thanks Senator. Seems that the newer mortgage rules are very strict, in my particular case the limiter was income (counting salary only, could not count investment income unless I withdrew it regularly) plus the fact that I did not want to make selling my current home contingent. With that formula the mortgage I qualified for was < 500k, not worth the hassle.

So one could treat the LOC as a mortgage paying it down monthly or just interest only until there is a reason to pay it off. Curious about your statement about paying interest only, why?
The purpose of using an interest only loan is to have more cash flow. Investors use it because they will sell the property later, at a higher price. Paying down principle doesn't make sense, only to get it back in a few months.

The bank says you do not have enough income, unless you sell your current home, or withdraw assets. Likely you will be a bit squeezed if you do take out the loan on the property. There are a lot more expenses in any property, other than the mortgage.

The new mortgage rules are not strict, they are based on risk. There is a reason why the bank doesn't want to lend the money.
__________________
FIRE no later than 7/5/2016 at 56 (done), securing '16 401K match (done), getting '15 401K match (done), LTI Bonus (done), Perf bonus (done), maxing out 401K (done), picking up 1,000 hours to get another year of pension (done), July 1st benefits (vacation day, healthcare) (done), July 4th holiday. 0 days left. (done) OFFICIALLY RETIRED 7/5/2016!!
Senator is offline   Reply With Quote
Old 05-08-2016, 11:34 AM   #7
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
pb4uski's Avatar
 
Join Date: Nov 2010
Location: Vermont & Sarasota, FL
Posts: 16,433
Sounds like the tax benefit will be the same as mortgage interest... 1:1 reduction of taxable income and you have the flexibility to pay interest only or more than that at your discretion.

I assume that you could get a "margin call" if the value of your investments were to decline dramatically?
__________________
If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
Slow and steady wins the race.
pb4uski is online now   Reply With Quote
Old 05-08-2016, 11:46 AM   #8
Recycles dryer sheets
 
Join Date: Feb 2016
Posts: 63
Yes, I liked the flexibility too - very simple to setup and live with.

They use a ratio depending on the specific investment mix, and yes in a bad scenario the equivalent of a margin call could take place. But I am borrowing well below the current value so not concerned even in a big fluctuation.
__________________
DanP is offline   Reply With Quote
Old 05-08-2016, 01:19 PM   #9
Recycles dryer sheets
 
Join Date: Aug 2009
Location: westerville
Posts: 242
We ran into the same issue of not qualifying for a mortgage a last year even with 50% down when we were thinking of buying a new home until I actually spoke to a Private Client rep at JP Morgan Chase. Not sure of your age but Fannie and Freddie will use retirement assets to calculate underwriting income if you are 59.5 or greater. The take your total and divide by 360. So for example you have $1,500,000 they would use monthly income of 4,166 to qualify. We are not 59.5 however due to our banking relationship and great credit score they made an exception to the 59.5 rule and approved our 30 year fixed rate loan upon verification of assets. Rates were same no upcharge. We did not have to show any draws . The others I spoke to that said we not did qualify did not deal with high net worth individuals and did not know of this underwriting guide line. If you want to go this route find a lender that deals with retired and high net worth individuals.
__________________
Trawler is offline   Reply With Quote
Old 05-08-2016, 01:59 PM   #10
Recycles dryer sheets
 
Join Date: Feb 2016
Posts: 63
Good info Trawler. Right, the volume mortgage outfits seemed very constrained and not catering to high net worth individuals, all the weight is on income/expense ratio assets not considered.

The LOC product I got is through a wealth-management relationship. Seems like the best way to go for my situation.
__________________
DanP is offline   Reply With Quote
Old 05-08-2016, 02:29 PM   #11
Dryer sheet aficionado
 
Join Date: Apr 2016
Posts: 26
I'd like to know more about your rationale for not paying cash. Understanding your thinking about that may guide you as to the right course of action.
__________________
brainsqueeze is offline   Reply With Quote
Old 05-08-2016, 02:52 PM   #12
Recycles dryer sheets
 
Join Date: Feb 2016
Posts: 63
I haven't had a mortgage in my last 2 homes, so going for a loan now is a change.

The LOC is very cheap (significantly cheaper than current 7/1 arm rates), simple (no points, escrows, insurance requirements I may not choose), plus has tax advantages.

I believe that keeping the money invested instead will net a gain, and should that change its a simple payoff. There are no setup, entry or exit fees on the LOC.
__________________
DanP is offline   Reply With Quote
Old 05-08-2016, 03:32 PM   #13
Dryer sheet aficionado
 
Join Date: Apr 2016
Posts: 26
Since your goal is to maximize your leverage, I agree you should take the largest LOC you can.
__________________
brainsqueeze is offline   Reply With Quote
Old 05-08-2016, 05:08 PM   #14
Thinks s/he gets paid by the post
 
Join Date: May 2014
Posts: 2,989
Quote:
Originally Posted by DanP View Post
Good info Trawler. Right, the volume mortgage outfits seemed very constrained and not catering to high net worth individuals, all the weight is on income/expense ratio assets not considered.

We ran into that last year. I was one year post-retirement and DH had been since 2003. Excellent credit ratings, we wanted to borrow $150k on a $250k house, and our investments had increased by $100k since I retired despite withdrawals.

I swear they were fixated on our documentable income, which was $34k between DH's SS and my small pension. They loaned us only $100k. Silly.

In retrospect it worked out; we have a low mortgage payment and pulled the extra $50k out of our investments just before the August crash. Good timing.

We have no other debt but the 3% rate was low compared to our average returns and we have enough deductions that we can itemize the interest.
__________________
athena53 is online now   Reply With Quote
Old 05-08-2016, 07:21 PM   #15
Full time employment: Posting here.
gcgang's Avatar
 
Join Date: Sep 2012
Posts: 927
We used LOC as bridge loan between the purchase and sale of homes. Paid it down because the rewards of leverage weren't worth the extra risk for my situation. Usually leverage, especially at today's low rates, increases your returns. Until it doesn't.
__________________
In theory, there's no difference between theory and practice. In practice, there is. YB
gcgang is offline   Reply With Quote
Old 05-08-2016, 07:55 PM   #16
Full time employment: Posting here.
 
Join Date: Sep 2007
Posts: 717
Quote:
Originally Posted by DanP View Post
the limiter was income (counting salary only, could not count investment income unless I withdrew it regularly)

So what's the problem? Set up a monthly withdrawal plan, get a couple of month's history, apply for the mortgage, when the mortgage closes cancel the monthly withdrawal plan.

That's what all us retirees have to do. That's how I refinanced 4 times after I retired.

I even pointed out to one loan processor that I could cancel the withdrawal plan after I got the mortgage. She said, yes and somebody with a job & regular paycheck could get laid off 2 weeks after they got their mortgage.

What they want to see is something that looks & feels like a steady paycheck.
__________________
rayvt is offline   Reply With Quote
Old 05-08-2016, 08:00 PM   #17
Thinks s/he gets paid by the post
 
Join Date: May 2014
Posts: 2,989
Well, I'm hoping that this won't be a concern anymore since we just downsized to our dream house and I can't imagine getting a much lower rate than our 3% 15-year fixed.

I don't like the idea of a fixed draw because, while I have a good handle on our everyday expenses, I prefer to withdraw as needed for major expenses such as a new furnace. Keeps the money working in the meantime.
__________________
athena53 is online now   Reply With Quote
Line of Credit backed by investments
Old 05-08-2016, 08:12 PM   #18
Recycles dryer sheets
robertf57's Avatar
 
Join Date: Jun 2014
Posts: 329
Line of Credit backed by investments

Quote:
Originally Posted by athena53 View Post
Well, I'm hoping that this won't be a concern anymore since we just downsized to our dream house and I can't imagine getting a much lower rate than our 3% 15-year fixed.

I don't like the idea of a fixed draw because, while I have a good handle on our everyday expenses, I prefer to withdraw as needed for major expenses such as a new furnace. Keeps the money working in the meantime.

And why couldn't someone just move the same 10k in and out every month or maybe hide the returning of the money a little better by doing it every other or every third month? Whole thing seems asinine, IMHO.......


Sent from my iPad using Early Retirement Forum
__________________
robertf57 is offline   Reply With Quote
Old 05-08-2016, 08:21 PM   #19
Thinks s/he gets paid by the post
RobbieB's Avatar
 
Join Date: Mar 2016
Location: Central CA
Posts: 2,491
Not really.

A person could have massive net worth but not "liquid" eh?

A bunch of limited partnerships, RTIF's and real estate? Some "questionable" equities?

The bank really doesn't want to hire an expert to go over your bag doing a "can he pay the bill each month" analysis. They just go by the charts.
__________________
Retired at 59 in 2014. Should have done it sooner but I worried too much.
RobbieB is offline   Reply With Quote
Old 05-08-2016, 09:56 PM   #20
Thinks s/he gets paid by the post
 
Join Date: May 2014
Posts: 2,989
Quote:
Originally Posted by RobbieB View Post

The bank really doesn't want to hire an expert to go over your bag doing a "can he pay the bill each month" analysis. They just go by the charts.

That's what credit reports are for! In our case the answer would have been decades with no late payments on anything. I just told our mortgage broker, who's a member of our church, that I knew if he were George Bailey in "It's a Wonderful Life", he would have loaned us the full amount. He laughed. Too bad banks are so in love with their inflexible little tick boxes. We just didn't fit into them.
__________________

__________________
athena53 is online now   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
Home Equity Line of Credit Or Unsecured Personal Line of Credit? helocked Hi, I am... 18 05-03-2008 09:27 PM
Buying Mortgage Backed Securities Hamlet Stock Picking and Market Strategy 3 04-02-2008 10:57 PM
Mortgage-backed securities: "Who buys this crap?" Nords FIRE and Money 4 10-05-2006 12:51 AM
7-Eleven dropping Venezuela-backed Citgo REWahoo Other topics 10 09-28-2006 12:28 PM

 

 
All times are GMT -6. The time now is 10:28 AM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.