Margin Loan to Buy Home

Especially in high-price residential markets where demand outstrips supply (like in California), an increasing number of potential home buyers are looking for fast cash to close a deal or end a bidding war. The competition is also getting tougher because of large amount of cash flowing in such hot markets from Chinese investors.

Such home buyers are turning to margin loans for short-term financing, which are backed by a borrower’s investments. Typically, brokerage firms permit loan amounts of up to 50% of the portfolio’s value at the time the loan is originated. The money can be used for almost anything, including bridge financing—when a buyer needs cash to close on a new home before the current home is sold.

There are some pricing advantages of Margin loans over mortgages and other more traditional loans. There are no closing costs, no property appraisal and no prepayment penalties. Borrowers don’t even have to make monthly interest payments, though interest will then accrue on the unpaid interest, raising the borrower’s liability over time.

The downsides? Brokers fix a 'maintenance margin'; if the portfolio’s value drops below this threshold, the borrower is subject to a margin call and then must immediately deposit cash to bring their securities back to the maintenance margin percentage. Otherwise the brokerage firm will sell assets (at that lowered down value) to bring the portfolio back in line. Also, beware of the broker's charges and commission that needs to be paid for such sales.

That's why the margin loan should be used as a short-term strategy before applying for a jumbo mortgage or other financing after the home purchase closes. This reduces the risk of a margin call, a demand by the broker to immediately repay the loan if and when the portfolio’s market value falls.