Although most Americans have at least a passing understanding of the possibility of using home equity to obtain a low-interest loan through a home equity line of credit (HELOC), there are a lesser-known option for getting a quick line of credit. financing that could offer more attractive benefits for some.
The funding option is available to individuals or businesses that maintain a non-retirement investment account and may offer lower rates than comparable HELOCs with the potential for faster processing times.
The key to getting a good interest rate on a loan comes down to knowing that the lender will be repaid.
Homes in guarantee
To provide certainty, the lender often requires collateral to secure payment. On a HELOC, the collateral is the home and the borrower’s equity in the home.
But there are some disadvantages for lenders with houses as collateral. Usually, an appraisal is required to validate the home’s value to the lender. It can cost hundreds of dollars and take weeks to complete.
Moreover, in order to prove the existence of the collateral obligation, the lender often has to file documents with the local county auditor’s office, which also takes time and costs money. Finally, if the lender has to seize the asset for lack of payment, the process can be long and costly.
Some Americans have another asset that is ready to use as collateral for a line of credit: a non-retirement investment account. Due to the nature of the asset, the application process can be much faster.
Unlike a HELOC, no valuation is required because the assets in an investment account are valued daily by global markets.
Unlike a HELOC, the lender does not need to register the security with the local county auditor’s office.
For better or worse, if the lender has to seize the defaulted asset, the process is also faster and cheaper for the lender. These benefits translate in many cases to cost savings for the consumer and the possibility of faster processing times.
Like HELOCs, different companies offer a line of credit secured by the value of a non-retirement investment account.
Generally, interest rates are variable and may change from month to month.
Repayment options are also flexible. The borrower can choose to pay interest only on the loans or can repay the principal as desired.
When a person takes the loan, the lender has access to the investment account so that it can be used as collateral to secure the payment of the loan. Although the collateral (investment account) is secured in the same way that a HELOC is secured by a house, the process does not require filing with the county auditor’s office.
Typically, a lender will offer to lend within a range of around 65% of the value of the investment account.
For people who maintain investment accounts and have the account set up for a line of credit, access to funding is quick and easy. Typically, online access allows the borrower to request funds and have them deposited into a linked bank account within a day or two.
For some, it could also provide a comfortable source of cash in a pinch. As a result, it could also make an individual feel safe keeping a lower amount of cash in savings accounts.
A disadvantage of an investment account-based line of credit is the inherent volatility of the asset.
In other words, although the investment account is easier to value due to instant pricing, it is also more volatile. The stock market and assets associated with the stock market tend to be more volatile than assets such as houses that are used to secure HELOCs.
And, since most lenders are willing to lend based on account value (at perhaps 65% of the account, as mentioned above), there is a real possibility that in the event of a market downturn, the lender forces the borrower to add the money to the investment account to preserve the value of the collateral.
This caveat is especially important for borrowers who are borrowing as much as possible from the investment account.
Of course, a borrower should always be careful when borrowing money and providing security to a lender. However, an equity-based line of credit from an investment account can be a compelling alternative to a HELOC for those looking for additional access to liquidity.
Beau Ruff, licensed attorney, is Director of Planning at Cornerstone Wealth Strategies,
an independent, full-service investment management and financial planning firm in Kennewick.