| Finding the right financing for a home purchase is just as important as finding the right home. If you’re like most of us, you don’t have enough cash on hand to buy a home outright. You’ll need a loan, and 20 percent or more of the purchase price for a cash down payment. Where do you go for the additional financing? A traditional bank loan may be your first thought. But, there are other alternatives.
One recent innovation in home financing allows you to purchase a home while keeping your investment portfolio in tact. This new mortgage program is commonly known as a “securities based” mortgage and is available through some full-service brokerage firms, often in conjunction with a bank lender. As the name implies, the loan allows you to pledge your eligible securities, including most stocks, bonds and mutual funds, in lieu of a cash down payment. (Assets in qualified retirement plans, such as an IRA, are not eligible). In some cases, you may be able to borrow up to 100 percent of the value of the home.
Instead of liquidating your portfolio, a securities based mortgage enables you to maintain your investment strategy while postponing the capital gains taxes associated with selling appreciated securities. In addition, you are often still able to make trades within your account, receive interest and dividends, and participate in the future potential of your investments. Your resulting payments may be higher because you are repaying a larger loan amount, but you could also maximize your mortgage interest deduction.
How does the program work? The process is the same as for traditional mortgage financing. You can choose among the variety of fixed and adjustable rate mortgages available. Once you qualify for a mortgage, the amount of collateral required depends on various factors including the type of securities you wish to pledge as well as the terms of the loan transaction. However, for most home purchases, the initial pledge amount will be about 165 percent of the amount you wish to borrow. Because the loan amount is based on the securities in your account, you may be required to deposit additional cash or securities should the value of the securities you pledge decline below the minimum maintenance level. So, be sure you do thorough research to make sure this type of loan is suitable for you.
Next to planning for your retirement, deciding to buy a home is one of the most important—and complicated—financial transactions you will undertake during your lifetime. If you are a potential home buyer — whether a successful long-term investor who wants to maintain your established financial plan, or a parent wishing to help your children buy their first home — you don’t have to abandon your investment goals to come up with the down payment.
Borrowing against securities involves risks if your securities decline in value. These risks, as well as the suitability of this strategy, should be carefully considered beforehand.
(Editor’s Note: Cheryl Johnson is a financial consultant with Salomon Smith Barney is Silverdale. Salomon Smith Barney does not provide tax or legal advice. Please consult your tax and/or legal advisor for such guidance. Johnson may be reached at (360) 613-1986.)
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