Real Estate Report: Short-Term Loans to Secure a Purchase

The natural sequence in real estate for existing homeowners, such as move-up buyers or buyers looking to downsize, goes something like this: list your home, sell your home, then buy your new home. But, life isn’t always so perfect is it? There is an increasing number of potential buyers turning to “margin loans” to help secure financing in a pinch.

You may be familiar with the term bridge loan, which is a short-term, temporary loan used to secure a purchase until longer financing is arranged. With bridge loans, the existing home’s equity is taken into consideration as collateral with the intention that the bridge loan will be repaid with the proceeds from the sale of the old home. A homeowner with a bridge loan may be forced to pay two mortgages until the old home sells, and bridge loans carry higher interest rates with additional fees that add to their cost.

But, a margin loan is different. Margin loans are backed by a borrower’s investments. Brokerage firms typically permit loan amounts of up to 50 percent of the portfolio’s value at the time the loan is originated. Margin debt was driven to $580.9 billion at the end of 2017, which was a 16% increase over the previous year.

There are some financial advantages to margin loans over other short term financing options. Borrowers pay no closing costs, no property appraisal is required, there are no prepayment penalties, and no requirement to pay monthly interest payments. It was also reported that margin loans may have tax benefits that include not having to pay capital gains taxes and any interest that may exist on a margin loan is generally tax deductible.

There is what brokers call a “maintenance margin”, where the borrower may be subject to a “margin call”. If the portfolio’s value drops below the given maintenance margin threshold, the borrower would have to deposit funds to bring their securities back to the proper percentages. Or, the brokerage firm would sell assets to bring the portfolio back in balance.

It is suggested that borrowers not borrow up to margin limits, and keep in mind borrowers still have to qualify in the areas of income, net worth, credit check and monthly debt payments. And, while margin loans do not have traditional closing costs, brokerage firms do charge fees and commissions, so check with your financial planner/firm to get a full representation of the costs involved.

Lauren Bunting is a licensed REALTOR®with Bunting Realty, Inc. in Berlin, MD.

Lauren Bunting is a Broker with Keller Williams Realty of Delmarva in Ocean City, Maryland.