Looking to buy a million dollar retirement home but need a short term loan?

0

I recently worked with a couple who found their perfect retirement home. But they were renovating the kitchen in their current home, and it couldn’t sell it for a few more months, which would have given them the money to buy the new home. Knowing that their dream home wouldn’t be on the market for long, they had to act quickly.

They considered liquidating a brokerage account valued at just over $ 1 million. But taking that course would mean they owe over $ 100,000 in capital gains taxes.

Instead, a short-term line of credit called a $ 900,000 pledged asset line was put in place. It served as a bridging loan to provide the funds needed to purchase the new retirement home, covering their needs for about four months. After the renovation project was completed, the proceeds from the sale of the original home paid off the loan balance.

The interest cost of the loan was a fraction of the amount of money the couple would have paid in capital gains taxes if they had sold their investments. In fact, the couple saved over $ 90,000 by not selling their investments as their portfolio continued to grow during this time.

Instead of leveraging your investments for a quick injection of cash – and potentially paying tens of thousands of dollars in taxes – it can often make sense to borrow money using an asset line. pledging.

How it works

A pledged asset line allows investors to borrow money by establishing an asset-backed line of credit. The proceeds may be used for purposes other than the purchase of additional securities or the repayment of margin loans. They have flexible repayment options.

However, only certain assets can be used. These include after-tax brokerage accounts, revocable trust accounts, and other non-tax-advantaged accounts. Funds in Individual Retirement Accounts (IRA) – including Roth IRAs – Qualified Plans and Health Savings Accounts will not count.

A bank will determine how much it is willing to lend based on the value of those investments. For example, lenders can lend up to 90% on certain bonds and cash and more than 50% on individual stocks. The more stable the investments, the more banks are willing to lend.

For example, lenders will offer a higher amount for accounts holding certificates of deposit or corporate bonds. Riskier assets, such as alternative investments or junk bonds, will offer increased uncertainty to lenders and, therefore, they will be reluctant to lend more.

To approve these loans, banks often require that a person or couple establish a minimum line of credit, as well as a minimum amount to be withdrawn. After the initial drawdown, subsequent drawdowns may be made for smaller amounts up to the maximum amount approved by the lender.

There is no registration or account maintenance fee associated with a pledged asset line. There are monthly interest payments, much like how a mortgage or home equity line of credit (HELOC) would be paid off.

The interest rate is usually tied to a benchmark rate, such as the WSJ prime rate or 1-month LIBOR (London Interbank Offered Rate), plus an interest rate spread. The interest rate differential may vary depending on the value of your portfolio. Since current interest rates are so low, a lender may charge a minimum interest rate, called a floor rate.

When the couple mentioned above applied, they were able to secure an interest rate of 2.35%. Compared to their HELOC rate of 3.5%, they were able to save over $ 500 per month on their repayment.

Most of these loans are repaid within 12 months. There is no due date or prepayment penalty, so the borrower doesn’t have to worry about paying off the loan too quickly.

When you’re ready to start paying off your loan, just write a check or set up an ACH or wire payment. You can even use the interest and dividends generated by your portfolio to help pay off the loan.

What are the risks ?

While there are many benefits, there are also some risks to consider before applying for a pledged asset line.

Before you hit the full line amount, you need to understand the potential for money loss from your investments. If your account balance falls below a certain amount, the lender may ask you to make a lump sum payment.

For example, if a couple were to receive a $ 1 million pledged asset line based on their $ 2 million pledged account, then they must maintain the account balance above their outstanding credit lines. . If the pledged account were to fall below $ 1 million due to investment losses, the lending bank would ask them to eliminate the deficit. This would be done either by selling the assets in their pledged account to repay the loan, or by depositing the deficit in the pledged account in order to meet collateral requirements.

The lender also has the right to sell securities in this account without consent or notification. If you are unable to find the funds to repay the loan, the lender could be forced to sell your investments, which could lead to unintended tax consequences. And the borrower does not have the ability to determine which securities are sold.

In addition, it is not as easy to withdraw money from a pledged account. If you want to withdraw money from your account that is not used as collateral, you need to get approval from the lender.

Finally, minimum interest payments are due on a monthly basis, and investors may incur additional fees for late or missing payments if the interest is not capitalized.

The bottom line

A pledged asset line can offer huge benefits to investors. However, the details can be complex, so consult a financial advisor before proceeding. In most cases, these asset-backed lines of credit work well as a short-term tool to help cover large purchases. And by paying off the loan quickly, a person or couple could potentially save tens of thousands of dollars while still keeping their investment positions in place.

Wealth Planner, McGill Advisors, a division of Brightworth

R. Jason Rogers Jr. is a wealth planner with McGill Advisors, a division of Brightworth. Based in Charlotte, Jason helps develop comprehensive wealth management plans to provide financial clarity to business owners and corporate professionals. He graduated from Gardner-Webb University with a Diploma in Business Administration and also holds a Masters in Wealth and Trust Management.


Source link

Share.

Leave A Reply