I’m a new guy here, so forgive me if my logic misses the obvious.
$100K house, 100% financing secured by the house and nominally $39K worth of stock. Jim Piper’s concern is (I think), what if the stock price crashes $6K to lower than the $33K required to secure the loan.
If you had no money for the margin call, a viable option would seem to be:
Refinance the loan by selling $20K worth of stock to beef up the equity in the house, taking the captial gains loss as a small consolation.
I guess my point here is there IS a way out without getting crushed.
If one claims that you’ve lost the 6K in the stock market, I would say true, but that was lost anyway. What you give up in my scenario is the amount of stock working for you to try and regain the $6K, and trading 20K semi-liquid assets for illiquid equity in real estate.
Interest Only + 100% Financing - Posted by kdpinsf
Posted by kdpinsf on February 28, 1999 at 11:57:23:
Save on capital gains taxes and don’t lock up cash in your home. Keep your cash in your securities portfolio and watch it grow.
While no-money-down techniques are often discussed here, I’ve seen no mention of one specific method: 100% financing of a home by putting up additional collateral in the form of a stock portfolio. You don’t have to incur capital gains taxes by selling for a downpayment. And, if you do an interest-only mortgage, you get the best of both worlds: the lowest monthly payment, but one that’s always 100% tax deductible.
(This is a 100% mortgage, not an 80% mortgage and a separate 20% margin loan.)
Watch your stock portfolio grow? What happens if the market goes down? I know, I know?.it will never happen. But what if?? Where do you get the money necessary to further secure you home loan which required the additional stock collateral?
Are you aware that you can get 100% financing without a stock portfolio? You need good credit of course. Interest only loan?? Why’s this an advantage? Ten years from now there will be no equity build-up. You still owe what you started at.
I have just stumbled onto this option myself. I have one lender that will do an interest only with no prepayment penalties and one that would do 100% amortized over 30 years. I am seriously thinking about trying this option as it looks like it would make a property cash flow easier. I have bought and sold a few properties over the last few years and I wish I had been aware of this option since I had a lot of my own cash tied up in them.
Dave
I have just stumbled onto this option myself. I have one lender that will do an interest only with no prepayment penalties and one that would do 100% amortized over 30 years. I am seriously thinking about trying this option as it looks like it would make a property cash flow easier. I have bought and sold a few properties over the last few years and I wish I had been aware of this option since I had a lot of my own cash tied up in them.
Dave
JPiper, you make some good points and pose some good questions. I’ll try to address them.
There are two major reasons to pledge securities in a 100% mortgage. One is to gain leverage at a low interest rate. The other is to avoid diluting the effectiveness of your downpayment by avoiding paying capital gains taxes when you sell securities to raise a cash downpayment.
You asked, “What happens if the pledged stock portfolio goes down?” Well, the client’s net worth goes down, just like it would if the value of the house went down. If the securities portfolio drops to an aggregate value that’s less than 33% of the home value (from a starting value of at least 39%), there will be a margin call. This move would be a price drop of at least 15.38%, but prices do fall. You asked, “Where does the client get the money for this?” Depends on if there are other assets. In that situation, the client just may go broke, just like he might go broke if he were paying off a big, variable-rate mortgage and rates rose or if he choked on his fixed-rate, principal/interest payment, which is usually significantly higher than an interest-only payment.
You mentioned that it’s possible to get a 100% mortgage without pledging additional collateral (e.g., securities). True, but the interest rate will be higher than my example. Simple fact is that any financial institution will charge more for taking on more risk. There’s less risk in my example than in yours.
Finally, an interest-only loan is useful when you want to do two things: 1) minimize your monthly payment, and 2) maximize your monthly deduction. The value of these two things offsets the lack of equity buildup. The money saved (i.e., borrowed at
The bank gives you a $80K loan on the property and a $20K loan on your stock portfolio?
If that’s how it works, a) how much does the portfolio have to be worth and b) how limited are you after that to trade your stocks?
Seems to me this would be a major benefit to get a second mortgage crank going. For you guys who can rent houses for positive cash flow at retail prices - wow! This would be like printing money.
The bank gives you a $80K loan on the property and a $20K loan on your stock portfolio?
If that’s how it works, a) how much does the portfolio have to be worth and b) how limited are you after that to trade your stocks?
Seems to me this would be a major benefit to get a second mortgage crank going. For you guys who can rent houses for positive cash flow at retail prices - wow! This would be like printing money.
What was Mark Twain’s old saying?? “There are liars, d a m n liars, and then there are statistics”. Frankly your comments remind me a little of this statement.
Your statements are all predicated on the assumption that what was true in the past will be true in the future. And these ideas are all considered out of context?.the context being the nature of the risk that you undertake through high leverage.
Don’t get me wrong. I use leverage in my real estate investments. But I analyze EVERY deal from EVERY angle BEFORE I buy?.I analyze it carefully for risk. I consider what can go wrong. I give careful attention to my downside risk. This is the FIRST criteria I look at.
Leverage accomplishes a higher rate of return in good times. It’s also accentuates the risk in bad times. For those that believe there won’t be any bad times ahead this strategy of high leverage is ideal. In my case though I don’t have that kind of crystal ball. I’m not sure what the future will bring. I’m not positive that what’s happened in the last several decades will happen in future decades. Therefore I’m going to be more cautious. My risk?? I won’t make as much as you will. Your risk?? I’ll let you figure that out?there are some periods in history you might want to check out.
One thing I know without doubt??when you’re using a calculator or a computer, garbage in, garbage out. Assuming that the future will equal the past is called “garbage in”.
Lender (e.g., Merrill Lynch) lends you $100k, secured by two things: 1) your home; and 2) your stock portfolio, which must be worth at least $39k.
Regarding the value of the stock portfolio, in order to have a cushion of sorts, I recommend pledging a portfolio of at least $50k in this example. Retirement portfolios do NOT qualify. Your stock portfolio can drop to as low as $33k in value before you get a margin call.
Regarding trading the stock portfolio, that’s allowed, subject to the newly purchased securities being good, marginable stocks (i.e., generally, no penny stocks, etc.).
Regarding your “major benefit” and “printing money” comments, I’d put it more mildly. However, I agree that using both a 100% LTV ratio and an interest-only structure maximizes overall net worth in traditional, long-term investment situations.