Buying a Home with a Portfolio Line of Credit

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 Bank^® 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 established 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

Schedule an appointment

SCHEDULE NOW

Find a branch near you

FIND NOW

Important Legal Disclosures and Information

1. Chart 1, U.S. Census Bureau and U.S. Department of Housing and Urban Development, Median Sales Price of Houses Sold for the United States [MSPUS] (excerpt), Updated April 26, 2022, retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/ series/MSPUS (last accessed May 2, 2022); Chart 2, U.S. Census Bureau and U.S. Department of Housing and Urban Development, Houses Sold by Type of Financing, Cash Purchase [HSTFC] (excerpt), Updated April 26, 2022, retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/HSTFC, (last accessed May 2, 2022). The data set used to produce the charts.

2. Goodman, L. and Ratcliffe, J. The Tight Housing Market Boxes Out Government-Insured Borrowers, Widening Homeownership Gaps, Urban Wire, Urban Institute, June 16, 2021, https://www.urban.org/urban-wire/tight-housing-market-boxes-out-government-insured-borrowers-widening-homeownership-gaps (last accessed May 1, 2022).

3. You cannot secure a loan with investments in your IRA (nor can you borrow from your IRA). Securing a loan with your IRA account is a prohibited transaction. Under current law, that transaction would cause the entire IRA to cease being treated as an IRA, causing the full amount of the IRA to be subject to income tax in the year of the prohibited transaction, and the account to be a taxable account from the first day of that year. See, IRS Publication 590-A, Contributions to Individual Retirement Arrangements (IRAs), For use in preparing 2021 Returns, February 18, 2022, p. 32, https://www.irs.gov/pub/irs-pdf/p590a.pdf (last accessed May 1, 2022). As of this writing, there is legislation pending in Congress that would cause only the portion of the IRA account used in the prohibited transaction to be subject to income tax. H.R. 2954, 117th Cong. 1st Sess. (2021).

4. QLP may not be utilized for purchasing margin stock.

5. If you have drawn on the line of credit and the value of the securities in your account falls below a required value, you may be subject to margin calls.

6. Remember, in order to deduct interest on debt used to acquire a residence you must itemize deductions. The so-called home mortgage interest deduction is not available if you elect to apply the standard deduction when calculating taxable income. IRC §63(b).

7. See, generally, Internal Revenue Code (IRC) §163(h)(3) and IRS Publication 936, Home Mortgage Interest Deduction, For use in preparing 2021 Returns, December 7, 2021, https://www.irs.gov/pub/irs-pdf/p936.pdf (last accessed May 1, 2022). Under current law, until January 1, 2026, interest on home equity indebtedness may not be deducted. IRC §163(h)(3)(F)(i)(I).

8. See IRC §163(h)(3).

9. As defined in IRC §121.

10. Within the meaning of IRC §280A(d)(1). For additional guidance on determining the taxpayer’s second residence see, Treas. Reg. §1.163-10T(p)(3).

11. Notice 88-74, 1988-2 C.B. 385. Additionally, the Notice provides:

In the case of the construction or substantial improvement of a residence, debt incurred prior to the time the residence or improvement is complete may be treated as being incurred to construct or improve the residence to the extent of any expenditures to construct or improve the residence which are made no more than 24 months prior to the date that the debt is incurred. Debt incurred after the residence or improvement is complete, but no later than the date 90 days after such date, may be treated as being incurred to construct or improve the residence to the extent of any expenditures to construct or improve the residence which are made within the period beginning 24 months prior to the date the residence or improvement is complete and ending on the date the debt is incurred.

Whether a residence or an improvement is complete depends upon all the facts and circumstances.

12. Different rules may apply to interest paid on debt used to acquire an investment property. See IRC §163(d). Qualified residence interest is specifically excluded from the definition of “investment interest”. IRC §163(d)(3)(B)(i).

These materials are furnished for the use of PNC and its clients and do not constitute the provision of investment, legal, or tax advice to any person. They are not prepared with respect to the specific investment objectives, financial situation, or particular needs of any person. Use of these materials is dependent upon the judgment and analysis applied by duly authorized investment personnel who consider a client’s individual account circumstances. Persons reading these materials should consult with their PNC account representative regarding the appropriateness of investing in any securities or adopting any investment strategies discussed or recommended herein and should understand that statements regarding future prospects may not be realized. The information contained herein was obtained from sources deemed reliable. Such information is not guaranteed as to its accuracy, timeliness, or completeness by PNC. The information contained and the opinions expressed herein are subject to change without notice. Past performance is no guarantee of future results. Neither the information presented nor any opinion expressed herein constitutes an offer to buy or sell, nor a recommendation to buy or sell, any security or financial instrument. Accounts managed by PNC and its affiliates may take positions from time to time in securities recommended and followed by PNC affiliates. Securities are not bank deposits, nor are they backed or guaranteed by PNC or any of its affiliates, and are not issued by, insured by, guaranteed by, or obligations of the FDIC or the Federal Reserve Board. Securities involve investment risks, including possible loss of principal.

The PNC Financial Services Group, Inc. (“PNC”) uses the marketing names PNC Private Bank^® and PNC Private Bank Hawthorn^® to provide investment consulting and wealth management, fiduciary services, FDIC-insured banking products and services, and lending of funds to individual clients through PNC Bank, National Association (“PNC Bank”), which is a Member FDIC, and to provide specific fiduciary and agency services through PNC Delaware Trust Company or PNC Ohio Trust Company. PNC does not provide legal, tax, or accounting advice unless, with respect to tax advice, PNC Bank has entered into a written tax services agreement. PNC Bank is not registered as a municipal advisor under the Dodd-Frank Wall Street Reform and Consumer Protection Act.

"PNC Private Bank" and "PNC Private Bank Hawthorn" are registered marks of The PNC Financial Services Group, Inc.

Investments: Not FDIC Insured. No Bank Guarantee. May Lose Value.

Buying a Home with a Quick Link Portfolio Line of Credit (QLP)

Raising Cash

Is the Interest Deductible?

Interest Cost

Cash When You Need It

Important Legal Disclosures and Information