The home-buying season is kicking off and Indiana Business Review projects Indiana’s housing market will remain strong, with a low inventory and rising prices. This means buyers may need to act quickly to consummate a deal. What if you need to sell a house before you buy? There are options.
Perfection versus Reality
In a perfect world, you’d sell your existing home and buy a new home simultaneously. You can then use the funds from the sale for the down payment on your new home. However, we all know that life rarely gives us those perfect moments!
Here’s a more likely scenario. You’re thinking about moving, so you begin looking at what the market has to offer. Nothing seems like a good fit. Prices are too high; the homes that caught your eye would require too much work; and most discouraging, all the homes are selling before you can make a decision.
Then you find it—your perfect home! Now you’ve got a new problem. You are very aware of how difficult it was to find this home and you’re afraid the market is moving so quickly you can’t delay in making an offer. All of a sudden you’re buying a home before you’ve even listed your existing home!
So what do you do if your selling and buying cycle is out of sync? If you’re lucky, the buyer will allow you to make an offer on the condition that you are able to sell your existing home. Then you can align the transactions to your advantage. But in this current housing market, there are likely enough other interested buyers that the seller may not accept your conditional offer. Now what?
Should You Tap into Your Investment Portfolio?
Your first thought may be to use your investment portfolio to handle the down payment. However, there are a potential issues with this option. If your portfolio has done well, you may owe significant capital gains tax if you sell. The other downside: Whatever money you take out of your investment portfolio isn’t there to grow if the market goes up. So, you run the double risk of creating a tax headache and missing out on gains. All this for money you may only need for a short period of time! If you’re unwilling to take those risks to ensure you get your dream home, you have two options:
This option works by setting up an agreement with your account custodian allowing you to borrow against your investment portfolio. Retirement accounts are not eligible. The benefit of using a margin loan is that it’s easy to set up and often, the faster option. Once the margin is approved for your portfolio, you can withdraw those funds whenever you need them. But you’ll be charged interest on those funds starting at the time of the withdrawal. That leads to the biggest argument against using margin lending. Margin interest rates are normally expensive, typically starting in the high, single digits. That’s a far cry from mortgage rates which are now in the upper 3 percent to lower 4 percent range. You may, and should, negotiate for lower rates. This may not initially seem like a big deal if you anticipate your home selling quickly, but as we know, life isn’t always perfect!
Pledged asset lending:
Often investors don’t know this option exists for their portfolios. Pledged asset lending has similar characteristics to margin lending, but it’s normally offered at far cheaper rates. That’s attractive, but it comes with a catch. It’s more involved to set up this option. Some local banks will work with you for this type of loan as will most of the custodians where your investments are held.
If you need a short-term loan for financing a new home prior to selling your existing one, you may already have solutions available to you. Explore the pros and cons so you can effectively weigh your options. More importantly, talk with your financial planner before you find that dream home. Pre-planning can arm you with all your financing options upfront so you’re in a better position to make an informed decision.