Should I take out loan against my stocks for down payment?

Question

Hi, I am a first time homebuyer and would like to buy a primary home for myself. However, I am stock-rich, cash-poor. So I've been looking for ways to get around capital gains tax from my stock portfolio.

I did a quick check on E*trade and TDAmeritrade. The rates all look kind of high to me ($500k to $1M)

E*TradeTDAmeritrade

I also check my 401k program. Empower Retirement wants 5.25% interest rate for a $50,000 loan. Higher than Etrade or TDAmeritrade.

I am only looking to do the minimum down payment (20%~25%). I don't know if there is any first time buyer or down payment assistance program in Virginia that has high income threshold or no threshold at all. Otherwise, I am likely not qualify.

I don't know. Is there a better option I haven't though of? I've been on and off the BP forum but I will start reading more as I get more serious about home buying.

Stephanie P. · Answer

You're making all of these assumptions about loan amounts and a loan for this and a loan for that and you haven't even spoken to a lender that knows the area, the Fannie and Freddie loan maximums, what the down payment requirements are or why or why you wouldn't take a 15 year over a 30 year.

I don't know what you do for a living, but you're making a ton of assumptions about an industry that is really pretty intricate and in the pool you're thinking of swimming, has a massive amount of overlays meaning one lender will have a product that another doesn't have and another lender has a twist to the same product because their secondary market guy is willing to assume a little more risk than the other guy.

Call around to local lenders for what you're trying to do.  Take some time and do your homework and let someone ask questions to find out your short and long term goals.  Talk to your accountant about the impact of a 401K loan, stock liquidation or just using cash if you have it for the down payment.  Ask them if the write off of interest on a 15 year will offset the capital gain of stock liquidation or if it's better to take the long term money and pay it like it's a 15 year for the security of knowing you have a mandated low payment while you're still paying off the mortgage at a 15 year rate.  Have whatever lender you're going to go with explain the difference in FHA and conventional financing and mortgage insurance and explore the Jumbo market, particularly if you're looking in Arlington and the surrounding towns.

Your situation is rather complicated and needs a professional (actually more than one considering your lender, Realtor, accountant and maybe a lawyer to discuss putting the whole loan into a trust), not a call center, cookie cutter loan originator.

Best of luck

Stephanie

Sean Ploskina · Answer

@Andrew L.

It sounds like you need to talk with lenders to see what you will qualify for and what your payments would be in different scenarios.

Chris Mills · Answer

@Andrew L. I generally advise against borrowing your down payment, even for your primary residence. If you have the money in the cash value of your life insurance, that's the main exception. Again, generally speaking. Different institutions will respond differently when you've borrowed against market correlated products when we get a huge correction or pullback.

Shying away from PMI is a good thing. Normally I'd second @Jaron Walling's suggestion, but I've seen a lot of banks looking for 2 years of seasoning on the first loan recently. If that becomes prevalent, and you're stuck waiting 2 years to refinance, who knows what interest rates will look like 2 years from now? If you know in advance that your lender will let you remove PMI once you cross that LTV threshold, putting down less money up front and paying down your note faster as you can may be the way to go.

Andrew Spell · Answer

@Andrew L. Lots of good info in these posts. A couple finer points.

401(k) Loan - If you borrow from an employer based 401(k) and leave the job, you may need to pay it all back at the time of separation. If it's individual 401(k), that is not a concern. Suspect yours is employer based, meaning it's offered through your employer. These often involve employer matching contributions. There may be info on this on the same website you would use to initiate the loan. Or you can call the company that manages your plan.

Interactive Brokers - As Account Closed noted, you could consider transferring from ETrade/TD Ameritrade to IBKR, which has great margin loan rates. Believe IBKR will lend up to 50% of your balance using the other 50% as collateral. But if your borrow the full 50% and the stocks lose value, IBKR will sell some of your stocks to prevent further loss of collateral. You can reduce this risk by borrowing less than 50%. If you were to borrow 25%, your portfolio could lose more than 1/2 its value w/o triggering a sell off.

Borrowing for a down payment - As others noted, lenders generally don't like the idea of using a loan for the down payment. You could sell off the minimum amount to get the down payment you need. As i write this I'm wondering if a lender would let you cover the minimum down payment with cash - that is 3% for an FHA loan - and then add to the down payment with a loan to get out of the MIP range. Feels doubtful but the answer is no until you ask. Recommend laying out your full plan to the lender/broker to minimize the chance of any surprises.

First time buyer support - You mentioned Arlington. If you'd consider DC, you may qualify for a mortgage credit certificate. It's for 1st time buyers w up to 140k income for homes up to 565k w mtgs up to 548k - as of today. Not sure what fees are involved. An MCC offers up to 20% federal tax credit (not deduction, credit) on mortgage interest. You would need to use a participating lender - w FHA or conventional loan - to qualify. See the DCFHA page for more info and link to participating lenders - there are several: https://dchfa.org/homeownershi...

Finally, at these historically low mortgage rates, you may want to consider a lower down payment. You could consider buying a rental property when you're ready. You posted on BP so someone had to say this.

Dmitriy Fomichenko · Answer

Can't take a loan "AGAINST" your 401k, but if the plan rules allow - you can take loan "FROM" your 401k. The limit is 50% of the balance or $50K, whichever is less. 5 year is the term. And yes, the interest is paid back to your own account.

Mike McCarthy · Answer

@Andrew L. When you take a loan against your 401K, I believe the interest you pay is actually paid back into your own investment. So while it’s an ‘expense’ you’re pretty much just paying it to yourself (minus some fees of course). Double check that as that’s not my area of expertise - but might make it more palatable.

Also, most banks don’t like the idea of you using a loan for the down payment. They want you to have skin in the game, and that sort of removes it. Of course you have more assets than most would who would be taking that loan, so it might offset some of the risk.

Andrew L. · Answer

I am definitely qualified in terms of credit and DTI criteria. I'd imagine a mortgage with less than 20% down payment, even without PMI or MIP, will still be higher than ones with the 20% down payment. The question is, how much higher?

Jaron Walling · Answer

@Andrew L.

Here's your problem: "I only check online from reputable lenders. I don't know local lenders."

If your credit and DTI is good you don't need 20% down to purchase a primary. Use that money to add value and ReFi later into better terms (hint hint without PMI). Most banks let you do this after 6-12 months. Be weird! Take no prisoners. Always look to solve problems make offers with a huge EM deposit. Problems = potential.

Andrew L. · Answer

Alright. Looks like I will need to get in touch with someone local. There is a lot of little nuances I just don't know about.

Andrew L. · Answer

FHA is an interesting option. I kept thinking I wouldn't qualify for but it reads like there isn't much income threshold after all. However, I still hope to obtain the lowest rate possible, since I will more likely go with a 15 years fixed loan rather than a 30 years.

So I plan to put own 20% (to avoid PMI or MIP) and secure a jumbo loan (if SFH or condo) to lower the rate. If I go with my current plan, I would have to take out two loans:

1. Around $100k - 150k loans for down payment

2. Around $500k to $800k jumbo loan

Is there other option I am not aware of? What do stock-rich-cash-poor people typically do in my case?

Should I take out loan against my stocks for down payment?

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