Borrowing Against Investment Portfolio For Home Purchase

[Tranquility Base]

We are hoping to finally pull the trigger this year on “downsizing” and moving from a single-family home to a townhome. I used to think that when you downsize, the cost of your new home will be less than the value of your existing home. But I think in reality, for whatever reason, the new place usually costs more than the old place.

I am trying to figure out the best way to pay for the new residence. The funds are there but the timing of coming up with the funds for the purchase could be an issue. In a perfect world, we would close on the sale of our existing home in the morning and close on the purchase of the new townhome in the afternoon, using the proceeds from the sale in the morning to pay for the purchase in the afternoon. But that’s threading a pretty small needle. In addition to having the necessary funds in our portfolio and not needing a long-term mortgage to finance the purchase, we have the advantage of being able to do this on our schedule (so far, and subject to whatever townhomes are available) and not having a mortgage on our current home.

Schwab lists several plans on their website for borrowing against your portfolio while still staying invested. That is attractive because if the purchase were to close before the sale, would not have the equity in our existing home (no mortgage) available to apply against the purchase price for the new townhome. don’t want to have to sell a lot of investments and incur capital gains, just to have the liquidity for a short period of time to pay for the purchase, only to reinvest the proceeds from the sale a short time later (although I will probably have to sell some investments just to cover the price differential and selling and moving costs). I also don’t want to have to take out a mortgage, such as a short-term swing loan, if I can avoid it. Borrowing against our investment portfolio just seems like it should be a better and simpler option although I admittedly have no experience with doing that and don’t know much about the process.

I am in the process of looking at the Schwab possibilities to see how realistic and practical they are. They cynic in me says that borrowing against my portfolio might not be as simple or as beneficial as it seems. Has anyone else already been down this road and borrowed against their portfolio on a short-term basis to fund a real estate purchase? Or has someone found a better way of handling the situation. This might finally be a good reason to contact the latest representative Schwab has assigned to me but based on past experience with representatives, I am guessing that I would just be given a few telephone numbers at Schwab to call for further information. I would appreciate hearing anyone’s experiences or advice.

 

[CardsFan]

One of the members here (I think Pb4uski) is looking at the same thing. Hopefully he will come along to help.

 

[LateToFIRE]

I've not used it, but have a buddy with Schwab who swears by it. Schwab is well-known in that line of business, and bridge financing is a classic use of such lines. The alternative would be to mortgage up your existing home, but that would be time consuming and costly relative to your need to only fund a few days.

 

[RetiredHappy]

I had done it with Merrill Lynch LMA when I bought my 3rd home, while I was owning 2 other homes. It was a very easy proccess. I then sold one of my 2 homes and used the proceeds to pay off the LMA. You can only do it against taxable brokerage accounts.

 

[Jerry1]

You can only do it against taxable brokerage accounts.

You can’t borrow against your Roth?

 

[RetiredHappy]

You can’t borrow against your Roth?

For certain you cannot borrow against 401K and Rollover IRA. A search shows that you cannot borrow against ROTH either. I don't have a ROTH account.

 

[Mark1]

One option might be to rent back your house prior to moving. We sold our last house and rented it back from the buyer for ~7 weeks prior to us leaving town. It was all laid out in the closing process.
It worked beautifully for us, but it is an unlikely option.

 

[Peter]

I used the Schwab Pledged Asset Line (PAL) as part of bridging finance when we downsized. It worked out OK, apart from (a) held the PAL for longer than I expected, and (b) interest rates started going up in the second half of 2022.


In retrospect, bad timing. But all good now.

 

[Tranquility Base]

I had done it with Merrill Lynch LMA when I bought my 3rd home, while I was owning 2 other homes. It was a very easy proccess. I then sold one of my 2 homes and used the proceeds to pay off the LMA. You can only do it against taxable brokerage accounts.

Thanks. Good to know. I was only planning to pledge or borrow against my taxable brokerage account. But I wouldn't think that the brokerage would care if nontaxable accounts were pledged. The tax consequences are the customer's problem. Or maybe there is something that prohibits retirement accounts from being pledged.

 

[Tranquility Base]

I used the Schwab Pledged Asset Line (PAL) as part of bridging finance when we downsized. It worked out OK, apart from (a) held the PAL for longer than I expected, and (b) interest rates started going up in the second half of 2022.


In retrospect, bad timing. But all good now.

That's what I've been looking at - the Pledged Asset Line. I haven't looked in detail at the interest rate though. If we are lucky and the pledge is only in effect for 30-45 days, or perhaps even less, the risk of interest rates changing should be pretty low or at least the absolute cost of it wouldn't be significant.

 

[RetiredHappy]

Thanks. Good to know. I was only planning to pledge or borrow against my taxable brokerage account. But I wouldn't think that the brokerage would care if nontaxable accounts were pledged. The tax consequences are the customer's problem. Or maybe there is something that prohibits retirement accounts from being pledged.

It's IRA rules. Not up to the brokerage.

 

[Tranquility Base]

One option might be to rent back your house prior to moving. We sold our last house and rented it back from the buyer for ~7 weeks prior to us leaving town. It was all laid out in the closing process.
It worked beautifully for us, but it is an unlikely option.

I've thought of the possibility of renting back. But I agree that it is an unlikely option. It would really take the right buyer; someone who needs to move in later or at least has the flexibility to move in later. From past experience, however, the more dominoes you stack up, the longer things are dragged out, the greater the chance of the unexpected happening. So it is not only an unlikely option but it is also not my first choice. Glad it worked beautifully for you though!

 

[Out-to-Lunch]

For certain you cannot borrow against 401K and Rollover IRA. A search shows that you cannot borrow against ROTH either. I don't have a ROTH account.

IRS rules allow you to borrow against your 401(k) up to $50k (or half your balance, whichever is lower).

 

[RetiredHappy]

IRS rules allow you to borrow against your 401(k) up to $50k (or half your balance, whichever is lower).

We are talking about LMA, a (high $ amount) loan against your account with no limit as to when you pay it off.

 

[freedomatlast]

We upsized instead of downsized in March 2020 right before the runup in housing prices. We bought the house we wanted pulling the funds from VMRXX. When we sold the old place a month or two later, we put the net proceeds back into VMRXX. Easy peasy. Both deals were simple and uncomplicated and went very smoothly.

 

[pb4uski]

One of the members here (I think Pb4uski) is looking at the same thing. Hopefully he will come along to help.

Yes, we did it. We set up a Pledged Asset Line of Credit on my brokerage account. They have a formula for the percentage of the LOC for different types of assets. I think it is highest for money market funds and lower for equities. In my case the LOC is ~80% of the collateral value. The rate that they charge at the level we are at is currently 8.72% (SOFR + 3.4%). The underlying assets are yielding 5.03% so my net cost is 3.69%.

The initial (and only) draw was a wire from the PAL to the title company for closing and was very easy to do.

We are using this as a bridge loan between when we bought our Texas house and sell our Florida condo. I didn't want to sell 80% of my brokerage portfolio to raise the proceeds to buy the new house. I'm hoping that we can sell the condo in 60-90 days and then use the procds from the sale to pay down the PAL. If it takes too long to sell the Florida condo then I may consider selling some assets but not quite yet.

Neat thing is that there are no payments required, when the interest is paid it can just increase the loan balance.