MOVE-UP BUYERS: FINANCING OPTIONS FOR PURCHASING A LARGER HOME
As of 2018, household net worth was at an all-time high of $100.3 trillion, nearly double the level in 2008 when wealth was devastated by the recession.
“Affluent households have greatly benefited from strong growth in the stock market in recent years, and the steady rise in home prices has likely given them reassurance that real estate remains an attractive long-term investment,” says Lawrence Yun, Chief Economist for the National Association of Realtors.
Commenting on the growing trend of second home purchases, Yun says it “reflects long-term growth in the numbers of baby boomers moving closer to retirement and buying second homes to convert into their primary home in a few years.”
The impressive gains in household net worth and investment portfolios are allowing young families and near-retirees alike the opportunity to move up into larger homes. Since purchasing a second home before selling an existing, primary residence offers many advantages (Homesellers, Owner-Occupied VS. Vacant Homes), move-up buyers are using a variety of financing options.
Partially Liquidating Investment Portfolios
Some people are selling part of their investment portfolios (stocks, bonds, etc.) to lock-in the significant gains in the stock market while freeing-up cash for the down payment or outright (cash) purchase of a second home. Liquidating part, or all of your portfolio, however, has tax implications you should review with your investment broker and tax advisor before proceeding.
Using An Investment Portfolio As Collateral
You can borrow against your stock portfolio by taking out a securities-based line of credit or SBLOC. A typical SBLOC agreement permits you to borrow from 50 to 95% of the value of the assets in your investment account depending on the value of your overall holdings and the types of assets in the account. SBLOCs generally allow you to borrow as little as $100,000 and up to $5 million. Click here for more information.
401(K) Loans
Technically, 401(k) loans are not true loans because they do not involve either a lender or an evaluation of your credit history. They are more accurately described as the ability to access a portion of your own retirement plan money—usually up to $50,000 or 50% of the assets, whichever is less—on a tax-free basis.
Conventional wisdom advises against withdrawing funds from your 401(k) early; however, borrowing from yourself is different from withdrawing funds permanently and does not incur the same tax penalties as withdrawing funds. If you fail to repay your loan within the allotted timeframe, it will be treated as a taxable withdrawal.
Using Existing Homes As Collateral
By means of a home equity line of credit, or HELOC, you can borrow up to 85% of your primary home’s value, minus the amount you owe on your existing mortgage loan. To get a home equity line of credit, you’ll typically need a debt-to-income ratio in the lower 40s or less, a credit score of 620 or higher, and home value that’s at least 15% more than you owe.
This type of loan is different from your primary mortgage in that you don’t get a lump sum. Instead, the loan acts as an on-call line of credit from which you can take out sums at any time during the withdrawal period and only required to pay interest until the end of the term. Note, however, that the interest rate is almost always variable. Click here for more information.
Cash-Out Refinancing
A cash-out refinance replaces your existing mortgage with a new home loan for more than you owe on your house. The difference goes to you in cash, and you can spend it on home improvements, debt consolidation, or other financial needs. You must have equity built up in your house to use a cash-out refinance. Click here to learn the differences between a cash-out refinance and a home equity line of credit (HELOC).
Can We Help?
When considering the different financing options at your disposal, make sure you contact your investment and tax advisors to choose the right one. Julie and her team are ready with excellent tax professionals we can recommend to you if needed.
For more information on how we can help with your move-up needs, please contact Julie at 650.799.8888 or Julie@JulieTsaiLaw.com to schedule a free consultation.