Personal Finance (Not Investing) • Portfolio Line of Credit vs Margin

Hello -

I was considering opening a portfolio line of credit with Chase (also called security based lending). But I wanted to see if anyone here has used this product from Chase before and how it compares with just using margin in a Brokerage account.

The purpose access liquidity from around $500K in investments (in broad market indexes) that have appreciated considerably. Total basis is around $350K and the rest of the $150 is mostly long term gain. My household income and state puts us (MFJ) at 20% marginal LTCG tax + 3.8% NIIT, and 44.3% federal + state + 3.8% NIIT for STCG. I don’t expect this to reduce in the next few years.

I intend to set it up now to supplement the downpayment for a home purchase in the next few months and also for general liquidity afterwards. I have separate funds (mostly cash) ready to cover 20% of the downpayment, but in case things don’t go according to plan, this can provide a backup.

Anyway, I had some questions on the mechanics of how that works, if anyone here has done this before especially with Chase, since Chase doesn't publish a lot of details publicly.

1. If I pledge $500K, I should be able to open a LOC for $250K.
   • But wouldn’t the exact amount I can borrow depend on the value value of the portfolio? If the portfolio drops, does that change the amount I can borrow? Is this adjusted daily or monthly?
   • What is the effective maintenance margin requirement? Is it 30% or 40%?
   • Is this (the maximum amount I can borrow without a margin call) clearly visible on the Chase website ? (Please note: I DO NOT intend to get ANYWHERE close that amount).
2. Once a LOC is setup, how fast is it to withdraw from it? Does it transfer to my Chase checking account immediately or does it take 1-3 business days like regular EFTs?
3. I understand that I can’t use the funds I withdraw from the LOC to purchase securities. But since money is ultimately fungible, how is this enforceable? Can I continue to invest my paycheck as usual? Or does it restrict taxable investing?
4. Can I actually use this to cover a downpayment for a personal home? Will this make a difference when I’m discussing mortgage terms with a lender? Eg. does reduce the monthly payments I can get approved for?

Overall, I was considering the following options:

1. PLOC. Chase has best rate at 7.57% for this, better than Schwab, Fidelity & Merrill. I have to jump through some hoops, but I am okay with those hoops. Plus there is a CPC bonus for moving my funds over.
2. Use Margin - The issue is that for $500K of assets, I’m not going to get good rates at most brokerages.
   1. I can get 6% at Robinhood, but I’d rather not do this. I’m cautious of Robinhood’s prior practices, especially for a taxable account where a mistake could cost me lots of money.
   2. At IBKR I can get 6% with Pro and 7% without Pro. I’ve heard mixed reviews of IBKR and there is a fee to transfer funds out + time delay to access the funds. I might move to this once I’m more comfortable with this platform but I don’t have an account with them today. But, is using margin at IBKR ultimately simpler than setting up a LOC at Chase?
3. Use short box spreads - I spent the last week reading as much as I could about this - and I believe I understand the mechanics. You can essentially get a lower margin rate using 4 index options. But, to me, the execution is tricky since it requires entering the right spread and trial and error to find the right price. Also, you have to know the exact duration of the “loan” and not all durations are equally liquid. Also closing out early has additional risks and requires additional tricky steps. On the plus side, I see ~4.6% rate for these on https://www.boxtrades.com/ today. Although I feel I can eventually figure this out, my take on this is that I’m more likely to make a mistake doing this at a time I will actually need to use this that can cost me more than the difference in rates.

Anyway, I appreciate any advice on what I’m thinking of doing and in case I missed some obvious details. I'd like some help to understand the mechanics of PLOC at Chase and chose between some of the options above.

Thank you!

Statistics: Posted by penguinwolf — Mon Dec 16, 2024 1:15 am — Replies 0 — Views 51

---