Prices for houses continue to rise along with the percentage of houses purchased with cash. Charts 1 and 2 illustrate these two facts.[1]

We’ve all heard the stories. This hot real estate market has resulted in the inevitable bidding wars, giving cash buyers an advantage over those buyers that must qualify for a mortgage.

In fact, some buyers seeking to finance a home through a U.S. Department of Veterans Affairs or Federal Housing Administration mortgage are finding themselves at such a disadvantage that they are being locked out of the housing market entirely.[2]

Chart 1: Median Sales Price of Houses Sold for the United States

Chart 1

*Chart shows shaded areas indicating recessions in 2001-2002, 2007-2009, and 2020
Source: U.S. Census, Department of Housing and Urban Development

View accessible version of this chart.

Chart 2: Houses Sold by Type of Financing, Cash Purchase

Chart 2

*Chart shows shaded areas indicating recessions in 2001-2002, 2007-2009, and 2020
Source: U.S. Census, Department of Housing and Urban Development

View accessible version of this chart.

Raising Cash

If coming to the bargaining table with cash gives you an advantage over other potential buyers, PNC Private BankSM can help you raise it.

One way to have cash ready when you make an offer to purchase a residence is to borrow secured by other assets. If you own securities in a PNC Private Bank investment account, you can quickly borrow cash secured by the value of those securities[3] through a Quick Link Portfolio (QLP) line of credit.

A QLP line of credit gives you a fast way to access cash secured by your investment account and can be put in place at any time without any origination costs. The line allows you to be ready for almost any contingency[4] by being able to immediately access cash by drawing on the line. What if you just found your dream home and need cash quickly, but don’t have a line of credit already in place? Unlike many credit solutions that can require extensive underwriting, a QLP line of credit requires minimal underwriting and can be established quickly. Approval requires only a review of your credit report and FICO score and validation of the market value of the eligible securities in your investment account. You show up as a borrower with “cash in hand.”

The amount available to draw on your line of credit will vary based on the types of securities and their concentrations in your portfolio, but perhaps you could access 50% or more of your portfolio’s value.[5] Only after it is drawn will the line accrue charges, payable monthly and, potentially, interest only. Importantly, even though your line of credit is secured by the assets in investment account, there is no disruption to those investments or to your long-term asset allocation.

Is the Interest Deductible?

Your tax advisor can provide a complete review of the rules regarding the deductibility of debt used to purchase a home.[6] Nevertheless, the following are a few things to remember about debt used to purchase a new residence.

Only the interest on certain debt used to acquire a residence is deductible.[7] Under current law, interest on debt used to purchase a residence after December 31, 2017, and before January 1, 2026 may be deducted[8] if:

  • The residence is a “qualified residence”, which means the taxpayer’s principal residence[9] and one other residence selected by the taxpayer and used by the taxpayer as a residence[10].
  • The debt is “acquisition indebtedness,” which is any indebtedness “incurred in acquiring, constructing, or substantially improving any qualified residence of the taxpayer and is secured by such residence.”
  • The acquisition indebtedness has a principal value of $750,000 or less ($375,000 or less in the case of a married individual filing a separate return).
  • The “debt may be treated as incurred to acquire a residence to the extent of expenditures to acquire the residence made within 90 days before or after the debt is incurred.”[11]

As the line of credit is not secured by the residence, interest paid on that indebtedness may not be deducted as qualified residence interest.[12] Nevertheless, because qualified acquisition indebtedness with respect to a residence can be obtained up to 90 days after acquiring the residence, it may be possible to obtain a so-called home mortgage interest deduction when using the proceeds from a line of credit. In that case, the line of credit would serve as “bridge financing” allowing you to come to the bargaining table with cash, and later (within 90 days of closing) replace the outstanding line of credit with a loan secured by the residence (a mortgage) on which the interest paid qualifies for the home mortgage interest deduction.

The proceeds from your new mortgage would be used to pay-off the outstanding balance on the line of credit. When closing on a cash-out mortgage transaction within three months of an “all cash” purchase, PNC Private Bank clients are eligible for purchase loan-to-value limits and purchase transaction pricing, which may be more beneficial than a traditional refinance. The line of credit could remain in place, allowing you to draw upon it again for future cash needs.

Interest Cost

There are differences between the line of credit and a traditional mortgage. The interest rate charged on a line of credit is based on an establish market index interest rate plus a spread. The amount of the spread charged over the index rate can vary, for example a larger line of credit may carry a lower spread. Accordingly, the interest rate charged on a line of credit fluctuates as the index rate to which it is tied rises and falls. On the other hand, the interest rate charged on a conventional mortgage is typically fixed when the loan is made.

Chart 3 shows the monthly interest rate cost of a QLP line of credit based on different committed line amounts. This example assumes a 70% loan to value and further assumes that the QLP is fully drawn down.

Assumptions: QLP line of credit secured by PNC Private Bank investment management account. Amount of line to value of account is 70%. Line is fully drawn. Interest is not deductible; accordingly, income taxes are not considered. For ease of illustration interest rate is constant; for a line less than $3 million, the interest rate is 2.5% per annum; for a line greater than or equal to $3 million, the interest rate is 2.25% per annum.

Chart 3: Interest Charged on QLP Line of Credit

Chart 3

Source: PNC Private Bank

View accessible version of this chart.

Cash When You Need It

The QLP line of credit provides you with a fast way to raise cash for any reason. In this highly competitive housing market, coming to the table with an all-cash offer can give you a competitive edge.

Why not give yourself the flexibility to raise cash quickly by establishing a QLP? It could help you win the bidding contest for your next home.

If you would like to learn more about the QLP line of credit or any other credit or cash management solution, contact your PNC Private Bank Banking Advisor or Relationship Strategist.

For more information, please contact your PNC Private Bank Hawthorn advisor.

 


TEXT VERSION OF CHARTS

Chart 1: Median Sales Price of Houses Sold for the United States (view image)

Year Median Sales Price in Dollars
2002 181,000
2004 211,700
2006 257,000
2008 229,300
2010 230,500
2012 239,200
2014 285,600
2016 295,200
2018 314,400
2020 317,100
2022 441,400


Chart 2: Houses Sold by Type of Financing, Cash Purchase (view image)

Year Thousands of Units
2002 11
2004 11
2006 9
2008 6
2010 5
2012 5
2014 8
2016 7
2018 9
2020 8
2022 18


Chart 3: Interest Charged on QLP Line of Credit (view image)

Value of Account Line Amount Annual Interest Charge  
$1,000,000
$700,000
$17,500
$1,500,000 $1,050,000 $26,250
$2,000,000 $1,400,000 $35,000
$2,500,000 $1,750,000 $43,750
$3,000,000 $2,100,000 $52,500
$3,500,000 $2,450,000 $61,250
$4,000,000 $2,800,000 $70,000
$4,500,000 $3,150,000 $70,875
$5,000,000

$3,500,000

$78,750
$5,500,000 $3,850,000 $86,625
$6,000,000  $4,200,000  $94,500