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Hi HumbleDollar Community,
First of thanks to Jonathan and all of you for creating such a fantastic source of wisdom and practical advice. I am 53 and a novice investor (started very late ) with no residential property and semi-stable job. I have 2 young kids (got married late..) and plan to work till 64.
With the crazy housing market and bidding wars, I have been sitting on sidelines and getting priced out every year. I finally have come across a property in my town which I don’t want to leave (great schools) which I can afford. I have 70% cash saved and with my portfolio I can probably get 30% securities based loan without selling my stocks (using securities based loan aka SBLOC). The HOA has some dispute with the builder which doesn’t affect buyer/sellers but getting traditional mortgage without paying extra interest premium is difficult as loan companies may not able to sell the loan to Freddie Mac etc.
With help of SBLOC, I can offer 100% cash offer and have higher chances of getting the house and the interest rate is lower and floating.
I feel it’s better to stay debt free and worry free by not having any mortgage with high interest rates. I have enough emergency savings if I lose my job. I could potentially make better returns using the cash but I buy only low cost index funds and highly unlikely I can beat the interest returns in coming years. If I use SBLOC instead of a mortgage, I will lose interest tax deductions but I think the difference it’s not material.
– Should I pay 100% cash offer (which also gives me upper hand in negotiations) and stay mortgage free given I am 53? I plan to return SBLOC as fast as possible which allows me not to sell my stocks and pay capital gains.
– Is there any reason I should get a mortgage instead?
– Is it worth to use cash as much as possible and reduce % of borrowed money or sit on cash and increase SBLOC/Mortage so that I have access to my cash in case of unforeseen situations or dry powder if market conditions present some good opportunity (Cash is king?)
Thanks in advance,
Am Ka
This is a great question to post at Bogleheads.org, where there are helpful experts in many financial (and other) topics.
Thank you and will do.
Something else sticks out to me – – – your mention of an HOA dispute. Does the HOA have a reputation for disputes or worse? Living in a home where an HOA upsets your lifestyle might be difficult. Have you reviewed the HOA guidelines and are you satisfied that you can live with those rules?
Great point and HOA issue seems to be one off and will review as per your suggestion. Thank you.
Whoops, Jeff, hold up there. An HOA dispute with the developer is a positive sign, an indication that the HOA is willing to stand up for the homeowners against the large, wealthy entity whose only priority is to profit from their project.
I speak from experience. I led our HOA through the first two years of its existence, and I spotted the early warning signs that our developer was spiraling toward bankruptcy. I warned the city that the developer would likely try to recover its performance bond and sneak off without completing our project, specifically a half-million dollars worth of landscaping. And that’s exactly what they attempted. At our urging, the city confiscated the bond money before the developer went belly-up, and it will eventually be used to plant the remaining trees and ground cover we were promised in the construction phase.
Now if an HOA has a history of disputes with its own homeowners, that’s a warning sign, and I’d always suggest a buyer have a conversation with a Board director (and a couple of neighbors) before buying. I have completed my term and settled into a comfy emeritus position, from which I will have zero involvement in future debates over artificial turf and fence painting.
Interesting question. I have no experience with a SBLOC but I recalled reading about them. I found this article which discusses them. At the time of that article, interest rates were low and it seemed more attractive. I looked at today’s SBLOC rate on Fidelity, and they range from 7.48% to 6.28%, depending on how big the line of credit. This is comparable to current HELOC rates. Jonathan’s idea of using the SBLOC and then switching to a HELOC makes sense. You may also get a mortgage interest tax deduction, depending on the specific amounts. Alternatively. you could take out a 10 year HE loan and pay it off. That would have you debt free by your desired retirement date, and you could always pay it off earlier.
Another potential prompt source of temporary money for a cash closing could be your IRA if you have one. IRA rules allow you to “rollover” IRAs for 60 days without penalty.
In this 60-day time period, you could close on a property, obtain a conventional loan or Jonathan’s home-equity line of credit, and then pay back the temporary rollover of the IRA monies that had been withdrawn. Note that you will incur tax liability and early withdrawal penalties if you don’t meet the 60-day deadline.
I’ve used this procedure twice when I needed quick cash including for the closing of a house.
If you took out a securities-based loan, would you be at risk if the stock market plunges? Suppose we saw something like 2007-09, when the S&P 500 fell 57%. Could you face a margin call on the loan — or is your portfolio large enough that there would still be plenty of equity? If you took out the securities-based loan, I wonder whether you might establish a home-equity line of credit right after the real-estate closing, and use that to repay part or all of the securities-based loan, so you’re at less risk.
Thank you and great advice. I plan to use upto 30% of LOC to avoid the issue of potential margin call.