Cash is king. Everyone has heard this before, yet it’s so easy to take for granted. All it takes is one pandemic, one missed opportunity, or one sleepless night from a cash shortage to wake us back up to this reality.
While having adequate cash reserves are always encouraged, it doesn’t mean one has to have excessive amounts of cash just sitting in the bank earning next to nothing. It might just mean having quick access to cash, by leveraging assets already in place.
Below are three quick ways to borrow against existing assets to obtain quick access to extra cash.
HELOC (Home Equity Line of Credit)
Likely the most recognized and widely used of the mentioned methodologies, a HELOC is a great way to borrow against the equity you have in your house. Being a line of credit, it’s used in a similar fashion to a credit card in that you can use it, pay it off, use it again, pay it off, etc.
Once you have the HELOC established, you can access cash very quickly and you already know what your boundaries are. However, getting approved for a HELOC often requires a home appraisal and review of credit and financial history, which can take several weeks. So it’s important to open a HELOC before an urgent need arises so that you aren’t stuck waiting.
An attractive feature of a HELOC is that rates are often much lower than credit cards and personal loans, which make them great consolidation tools. However, when used in this way the interested paid is NOT deductible. The only way to deduct HELOC interest when it’s used to “buy, build, or substantially improve your home.” Even then, there are additional limitations worth looking into. One such example is if you use the funds to buy furniture and home décor, interest is not deductible.
When people need money from their brokerage account, they generally think about selling investments to generate cash. Not only does this rob you of any future growth opportunities from your investable assets, it can often lead to a hefty tax bill. So what if you just borrowed against the value of your investments in the short-term? This is known as borrowing on margin.
Interest rates on margin loans usually track short-term interest rates and are set by the brokerage firm.
One note of caution is making sure not to borrow too much against your portfolio. If the value of the underlying investments declines while the loan is outstanding, you could face a maintenance call requiring you to repay the loan before you’re ready. As with any debt, make sure to understand all the pros and cons.
Securities-Based Line of Credit
Very similar to a margin loan, a securities-based line of credit allows you to pledge your eligible investable assets at a bank to obtain a revolving line of credit. The pledge investments are held in a separate brokerage account by the bank, where they can continue to be invested.
In today’s fast moving real estate environment, borrowing against your portfolio with a securities-based line of credit allows a potential buyer to use cash to gain an edge in negotiations over other buyers. Once the sale closes, you can refinance the home and pay off the line of credit with the new mortgage.
Just because cash is good, it doesn’t mean that debt is bad. Debt is referred to as leverage because it can provide additional lift, influence, or advantage towards a particular outcome. When done right, that outcome can mean building wealth more quickly.Being smart about how and when to utilize cash vs debt is not always straight forward. Talk with one of us at Sage Wealth Planning to understand more about these strategies, and how to properly use cash and debt to achieve your goals.
 IRS Publication 936 (2020)