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SBLOC for new home
Posted on 12/30/23 at 8:54 pm
Posted on 12/30/23 at 8:54 pm
Looking at current rates and seeing that we can do much better with a SBLOC through Wells Fargo or Charles Schwab than local banks. I’m looking at a rate of 2-3%.
Has anyone done this before? How was that experience?
Has anyone done this before? How was that experience?
This post was edited on 12/30/23 at 9:19 pm
7
Posted on 12/30/23 at 10:35 pm to hey benji
SB = small business?
You won’t get to deduct the interest
You won’t get to deduct the interest
Posted on 12/31/23 at 5:36 am to hey benji
Securities backed line of credit. I’ve also seen them referred to as a pledged asset line of credit.
It’s using an investment portfolio as a line of credit. It has its risks and pros and cons but I’m curious if anyone has done this before.
It’s using an investment portfolio as a line of credit. It has its risks and pros and cons but I’m curious if anyone has done this before.
Posted on 12/31/23 at 8:32 am to hey benji
Can you just add Margin Borrowing to your existing investments account? I know this is not allowed on IRA money though.
Posted on 12/31/23 at 8:41 am to Skippy1013
How does margin borrowing work? Correct, it's not allowed in IRA money.
Posted on 12/31/23 at 9:42 am to hey benji
I shopped for one of these this year. I think it’s possible you’re misreading the interest rates - that is likely SOFR plus 2-3% which puts you in the 7.5% range. We ultimately opted to pay cash for the home improvement project we are now working on.
Posted on 12/31/23 at 9:50 am to hey benji
The main difference is that a margin loan may be used to buy securities while an SBLOC can not be. The interest rates on a margin loans are approaching credit card levels - 10+%. SBLOC will be more in line with mortgage rates.
Posted on 12/31/23 at 10:25 am to hey benji
I did this a couple years back and now the rate is about 6.95% so I am paying the balance down instead of letting it accumulate. The rate I negotiated is 1.55% plus SOFR which at the time early 2022 was .05% but is now up to 5.4%. You can negotiate rates. Best published rate I found was Interactive Brokers and I got Schwab to match it. Seemed like a great idea when mortgages were hitting 4% and I could borrow at 1.6% so I took extra and borrowed less on mortgage but that changed as SOFR went up. I couldnt find a good source on what to expect for SOFR rates as Fed rates rise. Initially SOFR stayed low but its been steadily climbing.
Are you sure the rate you found is flat 2-3% ? I'd be surprised if thats not just base before +SOFR. I havent seen one of these loans that's a fixed rate.
NY Fed.org SOFR Rate chart
Are you sure the rate you found is flat 2-3% ? I'd be surprised if thats not just base before +SOFR. I havent seen one of these loans that's a fixed rate.
NY Fed.org SOFR Rate chart
This post was edited on 12/31/23 at 10:36 am
Posted on 12/31/23 at 10:59 am to hey benji
Quick look at WF, Schwab and IBKR and they all still reference SOFR in their published rate so you get a variable rate SOFR +the published base rate.
Another thing to be aware of is the collateral requirements. If I recall Schwab lets you borrow up to 70% of asset value but I wouldnt get anywhere close to that because if market drops you can and will get margin called. Some brokers are more aggressive w margin calls than others. For instance, I've read IBKR will sell your assets at end of trading day if you fall below collateral requirements whereas Fidelity or Schwab may give you courtesy notice so you may have day or more to sell shares as you choose or gather collateral elsewhere.
A benefit of these loans is you may not be required to make payments. I can just let interest accrue and invest more which was my plan when combined rate was below 2%. It's essentially the buy/borrow/die strategy used by the ultra wealthy but as rates have climbed the risk isnt worth paying nearly 7% interest to me.
Yesterday, I just read in the small print that Schwab reserves right to demand a balloon payment of entire balance at anytime.
Another thing to be aware of is the collateral requirements. If I recall Schwab lets you borrow up to 70% of asset value but I wouldnt get anywhere close to that because if market drops you can and will get margin called. Some brokers are more aggressive w margin calls than others. For instance, I've read IBKR will sell your assets at end of trading day if you fall below collateral requirements whereas Fidelity or Schwab may give you courtesy notice so you may have day or more to sell shares as you choose or gather collateral elsewhere.
A benefit of these loans is you may not be required to make payments. I can just let interest accrue and invest more which was my plan when combined rate was below 2%. It's essentially the buy/borrow/die strategy used by the ultra wealthy but as rates have climbed the risk isnt worth paying nearly 7% interest to me.
Yesterday, I just read in the small print that Schwab reserves right to demand a balloon payment of entire balance at anytime.
Posted on 12/31/23 at 11:46 am to Negatiger1986
Margin can only go up to 50% of borrowing power to assets usually where the secured line can go up to ~90%. Secured line isn’t quite as flexible as margin though.
Posted on 12/31/23 at 12:43 pm to Shepherd88
So in an ideal situation, you could be leveraging your credit line at a rate of 2-3% while the account is gaining 7-8% annually?
Would that gain in interest pay back the credit line?
Would that gain in interest pay back the credit line?
Posted on 12/31/23 at 12:59 pm to hey benji
Sort of but not quite. Your growth in invested assets may out pace the interest on the loan. But if you were invested in interest bearing assets they probably wouldn't out yield the interest accrued. You are taking on the risk of being invested in assets that could go down. You can choose to sell assets or apply dividends or interest to principal or just let balance owed grow while anticipating a larger growth rate on the assets invested.
But current asset backed loan rates aren't that ideal. Instead you are looking at paying ~7% or more which you historically could out perform in an S&P 500 fund but could lose $ and may not be worth risk for a few % potential advantage. Back when total rate was <2% it made more sense to just let interest accrue and loan balance grow because I was confident I'd outperform in mid term.
But current asset backed loan rates aren't that ideal. Instead you are looking at paying ~7% or more which you historically could out perform in an S&P 500 fund but could lose $ and may not be worth risk for a few % potential advantage. Back when total rate was <2% it made more sense to just let interest accrue and loan balance grow because I was confident I'd outperform in mid term.
This post was edited on 12/31/23 at 1:08 pm
Posted on 12/31/23 at 1:06 pm to hey benji
Another consideration, it may take a few days or couple weeks to set up the pledged asset line. I thought given my. Asset base and credit score it would be nearly immediate but there was a longer wait than I anticipated and it almost delayed our mortgage closing. May be easier to expedite if you have a local branch to work with. Just dont assume you can start process and have $ in hand 3-5 days later. You could always set it up and have the line of credit open if needed or when SOFR rates improve.
Also may be a minimum initial draw for Schwab I think it was $70k.
Also may be a minimum initial draw for Schwab I think it was $70k.
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