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So I was just surfing the internet the other day, and stumbled upon a tidbit of info down in the comments section of an article which I had never heard of before.  

Supposedly a couple people mentioned that if you own stocks, it is very quick and easy to get a 10 year loan from your investment company at really low interest rates like 2%, simply using your stocks as collateral.  The way I understand it, say you get to a point where you only have 10 years go go on your mortgage anyways, and say you owe $80k at 4% interest, and you have 80K in stocks.  It almost seems like a no brainer to take the loan from your broker, and pay off the house, cutting your interest rate in half.

Has anyone done this?  I did more google searching I didn't find much on the topic, it doesn't seem to common.  Are there any pitfalls to it, or inefficiencies?  Perhaps any tax disadvangages or something? Or other more efficient things that can be done?

PS: The article, with the various comments at the bottom was here http://finance.yahoo.com/news/4-ways-to-compete-with-all-cash-buyers-122758502.html 

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When markets fall banks cut back on lending and that can prompt a lot of HELOCs to get closed out as 2008 showed. You wo... (more)

brettdoyle (Oct. 04, 2013 @ 10:05a) |

Yes, that's possible, but I think you're way overstating the risks.  There was lots of time in 2007 to tell there was a ... (more)

xerty (Oct. 04, 2013 @ 12:02p) |

+1 to Xerty's comments.

And again guys, we're not advocating maxing out on leverage on a single stock or even a concentr... (more)

TravelerMSY (Oct. 04, 2013 @ 3:55p) |

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You are asking for borrowing on margin. The rates are no where close to 2%.
ETA: You may get better rates for large balances but for ~80k, Options House is currently showing a rate of 3%   Linky
Not as bad as I had expected.

It's called a Pledged Asset Mortgage.
http://www.fatwallet.com/forums/finance/1268393/

fwuser12 said:   You are asking for borrowing on margin. The rates are no where close to 2%.
ETA: You may get better rates for large balances but for ~80k, Options House is currently showing a rate of 3%   Linky 
Not as bad as I had expected.

  IB is under 1.6% (closer to 1% for medium balances), Schwab is as low as 3% for their pledged account. Other brokers will definitely negotiate down to 3% for big amounts (i have done this).

Of course to justify this you need to think your stocks will outperform the margin costs or else you should just sell them and pay down your mortgage with the cash.  

Are these variable, X? That could be the deal killer versus a frm.

The margin loan could work out if you have an asset value of stocks that greatly exceed your mortgage value... but it is risky. If your account exceeds the margin requirements you will get a margin call from your broker. If you don't have cash to deposit that day then they will liquidate your positions.

The pledged asset loan has similar problems and the interest rate doesn't sound too appealing.

For tax purposes, interest expense is only deductible as home mortgage interest if it is secured by the property. Finance your house with a margin loan and best case is it is treated as investment interest expense which is limited by investment income. Worst case, it is personal non-deductible interest expense. There goes the benefit of the lower rate. Not to mention that the stock margin loan may end up getting called if the value of the securities drops.

It's not usually a 10 year loan. It's more comparable to a 1 month mortgage and can be called anytime in realtime if your loan to value gets out of whack. Not a bad way to borrow short-term. But in general you should match your loan maturity to your holding period. You could be forced out of your loan early if the value of your collateral declines, which won't happen with a regular mortgage loan.

A good use of it would be if you're worth 10 MM, all in a diversified portfolio, and you want to borrow 2 MM for a house. Your portfolio could fall 50% and you wouldn't be forced to sell out to cover a margin call.

Another issue: are these stocks part of your retirement? By pledging them against a mortgage, you stand the ability to lose the stocks if you default on the mortgage. If you're saving for retirement, don't touch it!

So what happens when the stock market tanks?

wateristasty said:   So what happens when the stock market tanks?
  Margin or Collateral call from the broker... the borrow has to come up with cash right then and there

This is a really, really bad idea. Because the rates can easily go to ten or fifteen or more percent very quickly. With a mortgage you are much more protected.

Wouldn't a better idea be to do a balance transfer AOR? As long as you can keep playing musical chairs with credit card balance transfers, you can average around 2% APR. 

could anyone post a list of brokers with the LOWEST margin rates?

interactive brokers has the lowest margin rates.

https://www.interactivebrokers.com/en/index.php?f=interest&p=sch...

can you margin your securities in an IRA account like your Traditional/Regular account?

If you're gonna dip into your equity, borrow against a 401k and you pay yourself the interest rate. All you pay is a minimal annual fee.

brettdoyle said:   
wateristasty said:   So what happens when the stock market tanks?
  Margin or Collateral call from the broker... the borrow has to come up with cash right then and there

  
I remember that margin loans getting called wiped out a lot of people during the dot com crash.  

 

i don't think you CAN margin any securities in an IRA account. that seems to be the case for me at Fidelity.

http://www.irs.gov/Retirement-Plans/Retirement-Plans-FAQs-regard...

1. Can a loan be taken from an IRA?

Loans are not permitted from IRAs or from IRA-based plans such as SEPs, SARSEPs and SIMPLE IRA plans. Loans are only possible from qualified plans that satisfy the requirements of §401(a), from annuity plans that satisfy the requirements of §403(a) or 403(b), and from governmental plans. (Code §72(p)(4); Reg. § 1.72(p)-1, Q&A-2)

Where are you going to get the money if they margin call you?

from the house you just paid off etc

ensignlee said:   Where are you going to get the money if they margin call you?
  The HELOC you get on your paid off house.  Draw to checking, wire out same day.  

Remember - this isn't an all or nothing deal.  Give yourself a lot of slack so you won't get a margin call til the market falls 50%+ and you can still save on some interest.

jerosen said:   http://www.irs.gov/Retirement-Plans/Retirement-Plans-FAQs-regard... 

1. Can a loan be taken from an IRA?

Loans are not permitted from IRAs or from IRA-based plans such as SEPs, SARSEPs and SIMPLE IRA plans. Loans are only possible from qualified plans that satisfy the requirements of §401(a), from annuity plans that satisfy the requirements of §403(a) or 403(b), and from governmental plans. (Code §72(p)(4); Reg. § 1.72(p)-1, Q&A-2)

You're asking the wrong question - you don't want to take a loan from your IRA.  You want to know if your IRA can borrow from your broker to buy stock (I.e. margin). The answer is yes, but those gains could well be taxable in part to the extent they are attributable to debt-financing, so you might have to file a tax return for your IRA separate from yourself.  Those people who buy houses in their IRA can get mortgages, but again only backed by the IRA and not by the individual.

In practice almost no brokers let you use margin in an IRA.  They won't stop you if you open an LLC funded by the IRA and open a margin account for the LLC thôugh.  

Venturion said:   Are these variable, X? That could be the deal killer versus a frm.
  Yes these are typically LIBOR linked.  But what's so scary about floating-rates anyway? Do you really think they'll be meaningfully different from zero in the short term? If you do you probably shouldn't be holding stocks since they'll take a big hit when that happens.  

It does sound like a good option for short term funding. I'll be looking into it, I expect some expenses like that over the next 18 or so months and had been gathering some info on AOR type options too.

xerty said:   
Venturion said:   Are these variable, X? That could be the deal killer versus a frm.
  Yes these are typically LIBOR linked.  But what's so scary about floating-rates anyway? Do you really think they'll be meaningfully different from zero in the short term? If you do you probably shouldn't be holding stocks since they'll take a big hit when that happens.  

  
This is a valid point, but I'm more interested in LT, fixed, low-rate debt.  Maybe I'm thinking about it wrong?  FYI, I hold very little public equity, so that part is consistent.

Another consideration: If you are in the US, your mortgage on your primary dwelling is likely tax deductible. Margin interest is not deductible in most cases. Discuss with a qualified tax adviser before you jump into something like this.

Also, all the warnings you got about maintaining your equity in your position are correct.

Incidentally, most brokers require you to maintain as little as 30% equity in your position--but if a stock becomes volatile, they can raise the equity requirement to 100%, and call the balance due on a day or two notice.

The good news in doing it your way is that if the market takes a dump, and your stock drops in value faster than your broker can liquidate you, you may owe your broker $200k for the stock you borrowed, but your house will be paid for when you declare bankruptcy, and most states won't allow them to sell it.

I have borrowed against my house to buy stock, but would not borrow on my stock to buy real-estate.

I appreciate the input, definitely sounds like not such a good idea as it sounded when I first heard about it, too much risk and complication.

avalon6;18013007 said:Wouldn't a better idea be to do a balance transfer AOR? As long as you can keep playing musical chairs with credit card balance transfers, you can average around 2% APR. 

  
I've often pondered about the musical chairs balance transfer option, to constantly juggle your balance each year between those 0% apr cards.  Only problem is I thought you can't pay mortgage payments with credit cards right? I know juggling like this is playing with fire if you don't have the cash, but say you had enough cash (in an interest bearing account) to pay if off if you ever failed to get the next transfer, perhaps it would be worth it?

This product is really intended for two types of people:
1. Those with significant assets but no income who can't qualify for a traditional mortgage
2. Those with income that exceeds the threshold to claim the mortgage interest deduction

Anyone else who considers this product is just gambling.

supersnoop00 said:   This product is really intended for two types of people:
1. Those with significant assets but no income who can't qualify for a traditional mortgage
2. Those with income that exceeds the threshold to claim the mortgage interest deduction

Anyone else who considers this product is just gambling.

  
Not necessarily.  Lets say I've got a *lot* of long term stocks held in an account and the age of those stocks goes back 20+ years.  If I sell, I trigger tax liability.  If I'm looking at mortgage rates of 4-5% and can get a rate of 2% (per OP) upon pledging a reasonable portion of those assets, say <20% of current value, why wouldn't I do it?

 

Venturion said:   I'm more interested in LT, fixed, low-rate debt.  Maybe I'm thinking about it wrong?  FYI, I hold very little public equity, so that part is consistent.
  Theres a big premium for the long term guaranteed rate - that's why ARMs are so much cheaper than 30 year fixed rate mortgages.  If you pay up for long term fixed rate debt, you lose when rates fail to rise and yòu could have saved 1/3 of your interest costs with a floating rate product (that didnt float up, as it might turn out). If you think the fixed-vs-floating market is fairly pricing future interest rate risks, you should be more or less happy to take either.

Think of it this way - any stock or bond or mutual fund holdings you hold have some value as collateral.  If you're not using them to guarantee anything, you're getting nothing for that value.   So if the way you can get value for them involves taking floating rate risk at a fair price, that's still getting paid for something you were getting nothing for before.  Sure you might wish you had one risk instead of the other, but at least you're getting well paid to take it (and as I said above,its not all or nothing - you can take just a little so there's low margin risk, etc). 

margin rate can increase or it can become unmarginable suddenly if the broker thinks that the stock or ETF is risky due to fluctuation.  Ask people who traded financial stocks or ETF during 2008-2010, they know.

xerty said:   
ensignlee said:   Where are you going to get the money if they margin call you?
  The HELOC you get on your paid off house.  Draw to checking, wire out same day.  

Remember - this isn't an all or nothing deal.  Give yourself a lot of slack so you won't get a margin call til the market falls 50%+ and you can still save on some interest.

  When markets fall banks cut back on lending and that can prompt a lot of HELOCs to get closed out as 2008 showed. You would need to have the money taken out ahead of time.

brettdoyle said:   
xerty said:   
ensignlee said:   Where are you going to get the money if they margin call you?
  The HELOC you get on your paid off house.  Draw to checking, wire out same day.  

Remember - this isn't an all or nothing deal.  Give yourself a lot of slack so you won't get a margin call til the market falls 50%+ and you can still save on some interest.

  When markets fall banks cut back on lending and that can prompt a lot of HELOCs to get closed out as 2008 showed. You would need to have the money taken out ahead of time.

  Yes, that's possible, but I think you're way overstating the risks.  There was lots of time in 2007 to tell there was a mortgage crisis going on and draw your HELOC if you wanted and/or reduce your stock exposure, both of which would be prudent moves before 2008 came along.  If having a HELOC and some margined stock positions made you pay a little more attention and be a little more risk averse when the market started having problems, well, that would have saved you a lot of money relative to people who ignored the problems and held all the way down.

As someone who deals with margin a lot more than most people, I think there's a whole lot of fear-mongering about "Oh no, a margin call!" and that will scare people away from a really hot deal that will definitely put 3% interest savings in their pocket for every day between now and whenever your hypothetical margin call simultaneous with a HELOC closing and probably a job layoff too finally shows up.  Or of course it might never happen and all your interest rate savings mean you pay off the house and the margin loan before there's some catastrophic crash and you take the savings to the bank.  Lastly, let me note that for the efficient market believers out there, having to sell your stocks in a margin call just gets you fair value for them at the time (given whatever bad news is going on), which is a neutral financial result and in addition forces you to harvest some losses for tax purposes you were probably going to forget to do otherwise.

+1 to Xerty's comments.

And again guys, we're not advocating maxing out on leverage on a single stock or even a concentrated portfolio of stocks to do this. I would only sleep well at night borrowing against a diversified portfolio of assets with a fairly low loan to value ratio. The universe of FW folk that can borrow 20% of their account equity and have enough to buy a house is going to be pretty small anyway.



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