#FinancialAdvice #HELOC #BorrowingMoney
Hey there! So, it sounds like you’re in the process of buying a new house before selling your current one, and your advisor is suggesting using a Home Equity Line of Credit (HELOC) on your current home instead of taking money out of your brokerage account. Let’s break this down and see if it makes sense in your situation.
First of all, it’s important to understand that using a HELOC means borrowing against the equity in your home, while taking money out of your brokerage account means selling off investments.
Given that your current home has a HELOC at prime -1%, it may seem like a good option. However, you’re asking yourself if it makes sense to borrow money at 7.5% when you could just temporarily take it out of the market. This is a valid question to consider, especially if you have no capital gains in the brokerage account.
Consider the following points when making your decision:
1. Interest Rates: It’s crucial to weigh the interest rates on the HELOC and the potential gains or losses in the market. Since your advisor is recommending the HELOC, they may believe that the potential gains in the market are not worth the risk, or they may have other reasons for suggesting the HELOC.
2. Advisor’s Incentives: You mentioned that your advisor is paid a percentage, not per transaction. This is important to keep in mind as it could influence the advice they give. While most financial advisors act in their clients’ best interest, it’s always a good idea to understand how their compensation structure may impact their recommendations.
3. Market Timing: You mentioned that you’re in a hot market and that your house will sell quickly. This is a good thing to consider, as it may impact the urgency of your need for funds. If you believe that the money will only be out of the market for a short period, it might make more sense to use your brokerage account temporarily.
4. Overall Financial Picture: Considering that you’re 60, retired, and have no debt, it’s important to look at the bigger picture of your financial situation. Your advisor may be taking into account your overall financial goals and risk tolerance when suggesting the HELOC.
5. Past Performance: You mentioned that your account is down 3.5% as of yesterday’s close. While past performance is not indicative of future results, it’s worth evaluating your advisor’s track record and how their recommendations have impacted your portfolio in the past.
Ultimately, the decision comes down to your comfort level with borrowing against your home and your confidence in the market. It’s great that you’re asking questions and seeking to understand the reasoning behind your advisor’s suggestion. Additionally, your lack of capital gains in the brokerage account is also a key factor to consider.
Finally, it’s important to note that while your advisor may provide valuable insights, the ultimate decision is yours to make. Considering the various factors and discussing them with your advisor or a trusted financial professional can help you make an informed choice that aligns with your financial goals. Good luck with your decision, and enjoy the process of finding your new home! 🏡📈🔍
Do you have capital gains to worry about from your brokerage?
> temporarily
Paying 7.5% for a few months may make more sense than realizing capital gains in the wrong tax year, yes
Maybe. How is your advisor paid?
It might make more sense for advisor’s bottom line than yours.
I’ve never sold investments to buy something — except for college, and we paid for that out of 529s we set up for just that purpose.
How are you paying your advisor?
What does your advisor have you invested in?
You should find a new advisor. He’s giving you the advice that benefits him the most, not you.
Since you’ve already addressed the tax issue, the biggest concern with selling your assets and taking money out is that you miss a bounce in the market. Look at how November has performed for example. Taking money out of the market for even 30 days could force you to miss out on monumental growth. Now on the flip side, the market could also go down in the short term. That’s why we don’t time the market. With short time periods, borrowing from the HELOC allows you to keep your funds invested for your long term goals.
Owning 2 houses is 2 insurances, 2 property taxes, 2 maintenances, double worry, interest on carry over loan, then you could lose your sellers advantage in any kind of market.
What’s your overall situation? Age? Relationship status? invested assets in and out of retirement accounts?
Have you considered keeping the old house as a rental?
I guess I’m thinking if you have 10M in non-retirement investments that are just sitting around, you might as well buy the house cash. If you’re counting on this money to retire on, in my mind that increases the need to keep it invested.
I guess you’re not old like me. I was in HS when 30 year mortgages hit 18%. Fortunately, it was easy for homeowners like my mother to quickly refinance to lower rates.
Answer depends upon if you plan/need a mortgage to buy the new house.
Most mortgage lenders do NOT allow the borrower to use borrowed funds (HELOC) as any part of the down payment. Besides a HELOC is then included in your debt to income (DTI) ratio.
The historical return on the market is 10%. Would you rather lose 7.5% on your money or 10%?
Plus, there’s lots of volatility in the market. You could make a ton of money, lose a ton of money … who knows?
If you are paying an advisor to advise you on losing investments (or even winning ones), you should probably stop paying that advisor. You can pick your own ETFs without paying them every quarter. If you need a person to manage your money for you, find one who is a fiduciary.
If your advisor is paid a percentage of what you have in your brokerage account, then of course they are never going to suggest you lower the amount you have in that brokerage account because you are hurting *their* profit.
That being said, if your investments go up in value over those months, you could end up missing out on way more than what you pay in interest for a couple of months. You would need a crystal ball to know which will be better.
Clearly your adviser has an interest counter to your own. Do you think your investment will make more than 7.5% interest? That is the only thing that matters. Make your decision accordingly.
Use the heloc. If not sells fast, you’ll pay not much interest in $ terms.
Or sell your house before you buy.
Your “advisor” is putting his interests above your own. If you pay a quarterly fee to him, I assume the fee is AUM based. If you remove assets from him, his fee goes down if you don’t replenish the account quickly enough to bring the balance up at quarter end which is when your fee is calculated.
If your advisor has a negotiated margin rate with your custodian, that’s also an option. While you may pay interest, it may be better than liquidating assets and then buying them back, potentially running into wash sale rule violations.
But if you take it out of your investment account, your brokerage won’t get their “load fee” on your money. It doesn’t cost them anything if you take a higher interest loan then the return your not getting on their brokerage account!
What rationale did the Advisor give? Take that into consideration before all the comments here. The 7.5% is annual interest not just a straight up percentage. Monthly that comes to 0.625%. The Advisor might be thinking you could earn more on your money than 0.625% in the next month or two especially if your house will sell quickly. If the stock market rallies into the end of the year (week of thanksgiving is typically good and maybe Santa rally) and you could gain another 3-5% in December especially with bond yields coming down which increases the bond portfolio, then keeping the funds invested will actually outperform the short cost of the HELOC. How would you feel if you missed out on 3-5% gain? The flip side is the market could go down and now you have lost money plus owe the 0.625% or higher on the HELOC. Though if you aren’t invested then you can’t partake on upside. Without knowing the whole aspect you aren’t able to get a full picture of what your money can do for you. There isn’t one right answer for your question and you should talk more with you advisor as there’s probably 3-4 different scenarios that the advisor should tell you about.
Unless any fees related to liquidating what you need from the brokerage exceed what the interest on the HELOC would be for the time period you’d need it, you need a new advisor. I suppose there is a possibility that you’d miss out on market gains, but if you’re currently sitting at a loss…you need a new advisor.
I’d sell any securities that are at a loss for the year and realize some losses to help you with taxes.
Then I’d pull the rest from my HELOC…
And I’d fire the advisor and just rebalance the portfolio to 100% VTI and be done.
You don’t need an advisor.
I like leverage, using the equity in the current house is just smart.
It’s a gamble. The market has been on fire the last week or so. You can pay a guaranteed rate to your bank on the home equity line in exchange for the possibility that the market continues in its current trajectory. Of course we never know what the market is going to do for sure…
Personally, I would, and I have borrowed against a HELOC in order to not take money out of the market. 8% is only 0.67%/month. Closing cost on your HELOC are already paid for, right? He’s not asking you to take out a new HELOC is he? If he is, I would completely disagree with him. If you already have the HELOC then it totally makes sense to just use that instead of liquidating stocks.
What percentage of your portfolio are you paying in management fees?
Setting aside the HELOC rate vs the capital tax gains consideration (and I do realize there are no gains to consider here). Also setting aside the secondary question of why there are no gains – (maybe you insisted buying a ton of PLUG stock over your advisor’s recommendations – whatever the reason).
There’s a good bit of paperwork involved with selling equities and then rebuying them again. There are wash sale transactions that you’ll need to keep track of and net effective gains that you’ll have to figure out down the line when you do sell permanently. The paperwork of keeping track of all that is a pain in the butt (for you, your advisor, and CPA).
I would personally just pay the interest on the HELOC for a month just to keep the paperwork simple. Also I believe there are cases where the interest on the HELOC is tax deductible.
But yeah – whether your advisor is a fiduciary, shitty portfolio manager, or Warren Buffet Jr, I think is a moot point. Using the HELOC is by far the simpler option – IMHO.
Does your advisor have a financial interest on selling you loans?
Is your current house on the market?
Are you getting a mortgage for the new purchase? If so, what kind of mortgage?Indicative rates today are 7% for a 30 year fixed at a loan value under $500k
Do you have an accepted offer on a new house?
Will the new house be an investment, vacation home or primary residence?
How much is in your account, how much would you like to use, how is it invested, and what is your agreed investment strategy?
Btw, a brokerage account implies that it is managed by YOU whereas an advisory account implies that it is managed by HIM at an agreed rate. That rate can change based on the amount you are investing, so if your account dips under $250k he would be likely to increase his rate or drop you as a client
Went don’t you just ask your advisor to explain to you their reasoning? Ask questions.
In theory taking a short term loan from something that will be paid off when your current home sells is probably not an awful way to go unless carrying two payments would prevent you from qualifying for the new home.
I think so would investigate how loans against my 401k work before liquidating assets in my brokerage account as well.
I know people who were doing that because it was a lower rate a few years ago and avoided taxes and penalties. The risk is if you change or lose your job before it’s paid back it is treated as a withdrawal
You should find out what the brokerage house is offering for loans secured by your portfolio. It’s often less than a HELOC and your money stays in the market. Albeit usually in a set of generally accepted conservative mutual funds or EFTs.
Your advisor should have offered you a margin loan that is competitive with your HELOC rate. That way he makes even more in fees and your portfolio stays intact.
I had this same choice and harvested a loss for taxes by selling some of my managed brokerage account.
That being said, we took way longer to move out of our old house than we expected. There is a nice sense of urgency added to selling and buying at the same time.