I have a friend who has fallen on hard times, and he owns home that is (was) worth well over $1M. Like most Americans, he has the home pretty well leveraged, in fact owing much more on it that it is worth today. As you can suspect, his moral is low right now and he does not know what to do. He doesn’t want to lose his house, but he also knows his ability to make the payments on the home is coming to an end.
Creative Solutions To Home Financing
Fortunately for my friend, I have been doing quite a bit of research and reading on home finance right now. All the rules of the past 5 years have been thrown out the window and I am re-acquainting myself with traditional lending standards (you know, the kind that work….).
The first solution that I went back to requires additional collateral. Many of my clients have healthy IRAs and stock portfolios (healthy meaning a lot invested in them, not healthy as in performing well) and most do not want to liquidate because the valuations have fallen so far.
Use Your IRA To Help Reduce Your Mortgage Balance
The first thing I ask when working with a client in this situation is whether or not they have additional collateral that they can borrow against. In the case of somebody who is trying to finance (or refinance) a multi-million dollar home, we often look to their other investments. With many people having IRA accounts, that is a great place to start looking.
It is actually possible to borrow money using an IRA as collateral, that requires interest only or even no payments. So, look at this example:
John and Jane Smith own a large home with a mortgage balance of $900K. Their business is struggling right now and they are having difficulty making the payments on their home. They would feel much more comfortable with a smaller mortgage, but they cannot sell the home right now because the mortgage balance is far higher than the home’s current value.
John and Jane have done well in the past and currently have a substantial amount in their IRA accounts. While they cannot afford to take the penalties by liquidating the IRA and would not want to since this is for their retirement needs, they discover an alternative loan product that restructures an IRA under the guidance of a licensed financial planner. The IRA is liquidated temporarily, and securities are purchased which are placed into a nonrecourse HedgeLoan. The proceeds of the HedgeLoan are used to purchase selected insurance annuities, and the entire structure is then placed back into the IRA within the regulatory time limit.
The result is that as IRA holder’s John and Jane can “have their stocks and use them too” – have them working for them and growing while they have their IRA growing at a potentially higher rate through selected annuity products that can pay income. And remember that these are non-recourse loans. That means that if John and Jane need to default, they can, and owe nothing but the forfeited stocks, with no negative effect on their credit rating. And if the stocks go up in value, they may ask the lender to sell enough shares to repay the loan, and recoup an upside difference as profit. With many stocks trading at historic lows these days, most investors can expect them to rise in the future at some point.”
Use A Stock Portfolio To Replace A Mortgage Loan
Similar to the example above, people who have large stock portfolio’s can also raise money they need to purchase or refinance real estate. In the example above, if let’s assume that John and Jane had a stock portfolio of $2M. They do not want to liquidate their stock positions because they really think the current depressed market has driven the values to much lower than the stocks are worth. John and Jane know they just need to weather the storm and their portfolio with be worth much more again in the future.
Utilizing a Hedgeloan (a loan that uses a stock portfolio alone as collateral), John and Jane are able to borrow the entire $900K to pay off their mortgage. The new Hedgeloan requires no monthly payment! John and Jane are now having their money work for them, as opposed to them having to work for their money!
Why A Hedgeloan Works In Good Times and Bad Times
The greatest part about using a Hedgeloan is that it works for you in every future market scenario. Whether the market goes up, the market goes down, or the market stays flat, the borrower is covered:
- What if the stock market plummets? – With the turbulence that we have seen in the stock market lately, you want to use a non-recourse loan product (one that does not put your other non-secured assets at risk) that allows you to get the money you seek, without risking everything that you have. When the loan comes due, if your stocks are worth less than the loan, you can simply give the lender your stocks and the loan is satisfied! No deficiency. They took the risk and used the stocks as collateral.
- What if the stock market sky rockets? – This is a great scenario that gives the HedgeLoan borrower many options. The borrower could renew the loan, the borrower could sell some stocks and pay-off the loan, or the borrower could sell all the stocks and repay the loan plus pocket any additional cash.
- What if the stock market moves in parallel with the loan interest rate? – Again, this scenario gives the HedgeLoan borrower great options. The loan could be renewed or repaid by liquidating the portfolio.
Creative Financing Is A Mindset
This is the third article in an continuing series of articles on creative financing. The ability to “think outside the box” is really the essence of creative financing, rather than just a collection of a few loan products. Look for many more great Tallahassee Real Estate Blog articles that feature “creative financing” at the theme. Here are two previous posts that focused on facilitating real estate transactions in unconventional manners:
- Creative Home Selling – Taking A Lesson From Wall Street
- How And Why To Consider A Purchase Money Mortgage
Researching All The Hedgeloan Products
I strongly recommend that you do extensive research into the use of HedgeLoan as a potential solution to a cash or cash flow need. Of course, these loans require you to have some stock holdings…. A great web site to check stock loan hedge products can be found at HedgeLender.
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Not sure I agree with the advice. At some point you have to preserve cash and live within your means. Otherwise, in five years, John and Jane will end up with no house and no $500k IRA, not to mention having paid the interest on $450K mortage and the property taxes on a $900K house for five years. I would sell the house, even if it means cashing out a portion of the IRA to pay the deficit, taxes and penalty. Even if it is $150K, they will be left with a $350K IRA, can downsize to a $250K house and use the money they “save” on the mortgage and taxes to replenish their IRA. Within five years, they will still have rebuilt their $500K IRA and have a house they can afford (while continuing to build their retirement savings).
The ability to “think outside the box” is really the essence of creative financing, rather than just a collection of a few loan products. Look for many more great Tallahassee Real Estate Blog articles that feature “creative financing” at the theme.
Tony, I’m not sure I understand your point. If they use a hedgeloan to pay their mortgage down, they haven’t made a difference in “preserving cash/living within means” category. Selling their home now without “absolutely needing to” is foolish, you don’t buy high and sell low. The real estate market will recover and that will be the time to sell the home. If you analyze the loss offset as well as the penalty on the IRA withdrawal, your observation would have them lose the whole IRA.
I would sell the house, even if it means cashing out a portion of the IRA to pay the deficit, taxes and penalty. Even if it is $150K, they will be left with a $350K IRA, can downsize to a $250K house and use the money they “save” on the mortgage and taxes to replenish their IRA.
Thank you for the tips! Getting a mortgage loan can be a bit scary and it’s good to have as much information as possible before making a decision. This was great information.