How to Buy a Home with Cash - No Liquidation Required

How to Buy a Home with Cash - No Liquidation Required

Although housing inventories are increasing following the historical shortages of the past several years, the increases continue to be gradual and competition among homebuyers remains strong. If you’re in the market for a home, acting quickly and decisively is key. A cash offer can work to your advantage, as sellers appreciate avoiding delays related to the mortgage lending process.

What’s the best way to free up enough cash to make that offer? One option is a securities backed, or securities based, line of credit (SBLOC).

An SBLOC enables you to borrow funds using stocks, bonds, mutual funds, ETFs, derivatives and other securities in your taxable (non-retirement) brokerage portfolio as collateral, with no disruption to your investments and asset allocation. Like a home equity line of credit (HELOC), this revolving line of credit is available for you to draw funds as you need them, repay them (along with interest) and borrow again as needed. Many SBLOCs, including the Dollar Bank SBLOC, allow you to make interest-only monthly payments.

Benefits of a cash offer in a real estate transaction.

An all-cash offer, rather than a financing arrangement worked out through the traditional mortgage process, can be advantageous for both buyer and seller. Here’s why:

• For both parties, the risk of the deal falling through is minimized, because the buyer doesn’t need a mortgage approval; they have cash in hand.
• By eliminating the need for mortgage application, underwriting, approval and funding, an all-cash offer can streamline the homebuying process and get the buyer to the closing table faster.
• Depending on the agreed-upon terms, there may be fewer potential contingencies standing in the way of deal closing. The inspection and appraisal may be waived, for example. Again, the result is a faster transaction.

In short, sellers may give buyers offering cash preference over other bidders as they seek to sell their homes as quickly and seamlessly as possible.

Benefits of a securities backed line of credit.

Should you decide that you’d like to make a cash offer on a home, an SBLOC offers an alternative to liquidating assets in your investment portfolio. Rather than selling off securities, you can apply for this revolving line of credit that is collateralized by them. Because you are not required to cash out any of your holdings, you avoid the possibility of selling them at a loss, triggering capital gains tax or disrupting your investment strategy.

SBLOC borrowing limits vary by financial institution and client. The amount you can borrow is determined after your financial institution runs a risk analysis on your portfolio. Typically, institutions set a limit equivalent to 50% or more of the value of your portfolio. (Limits may be set on the higher side for clients with well-diversified portfolios, since those accounts are considered less risky.)

Once established, you can draw on your credit line any time (up to its limit) and make interest-only payments (check with your financial institution to confirm it offers this feature), or free up more of your credit limit by paying your balance down through larger payments, or even all at once.

If you are planning to buy a home using funds from your SBLOC, be sure to consult your tax advisor about the potential deductibility of the interest you pay.

Homebuying is just the start.

SBLOCs are flexible. You can tap into yours at your discretion for business and personal use. On the personal side, you can use it for much more than buying a home — emergencies, large purchases, outstanding expenditures, tuition payments, unforeseen expenses — anything you’d like. From a business perspective, perhaps you’d like to take advantage of an acquisition opportunity that has emerged, or you’d like to invest in commercial real estate or pay your taxes with your credit line. It is your line of credit, to be used however you feel it can be most beneficial.

Know the risks and rewards of your SBLOC.

Though it is a versatile and reliable source of funding, an SBLOC does carry some inherent risk simply because the value of your collateral fluctuates with the markets. Should the value of your account fall below the threshold set by your financial institution, it may issue a maintenance call notifying you that you must post additional collateral in securities or cash, or repay the loan within a specified period of time. If you can’t meet this requirement, your financial institution has the authority to sell your securities and keep the cash to satisfy this obligation.

Talk with your private banker or wealth advisor to learn more about the benefits, as well as the risks, associated with opening an SBLOC. At Dollar Bank, our private bankers stand ready to address all your questions and concerns.

This article is for general information purposes only and is not intended to provide legal, tax, accounting or financial advice. Any reliance on the information herein is solely and exclusively at your own risk and you are urged to do your own independent research. To the extent information herein references an outside resource or Internet site, Dollar Bank is not responsible for information, products or services obtained from outside sources and Dollar Bank will not be liable for any damages that may result from your access to outside resources. As always, please consult your own counsel, accountant, or other advisor regarding your specific situation.