ROANOKE TIMES
Copyright (c) 1996, Roanoke Times
DATE: Monday, June 10, 1996 TAG: 9606100069
SECTION: MONEY PAGE: 6 EDITION: METRO
SOURCE: MAG POFF STAFF WRITER
NEED cash fast?
You have many ways to borrow money, and one of those avenues is to look to some of your own resources. Borrowing against your assets may be faster and cheaper than more conventional bank loans.
Your house is the most obvious choice. You can take out a second mortgage in the form of a home equity loan, which is repaid in even installments, or as a home equity line, which is a type of revolving credit.
The interest rate for a home equity line at most banks is 1.5 percentage points above prime rate, or 9.75 percent at today's prime. Or it may be as low as 9.25 percent at some lenders if you're willing to pay closing costs.
Mike English, manager of the downtown Roanoke branch of First Union Bank, said 9.75 percent represents an effective rate of 6.72 percent for anyone in the 31 percent tax bracket.
Therein lies the biggest advantage for home mortgages, be they first, second or higher. They are the only loans that carry a tax deduction for interest payments.
You have to arrange for these loans in advance of actual need because they require a real estate closing, which takes several days - sometimes weeks - to arrange. But once you have a home equity line, you can simply write a check against your credit limit at any time. As long as you have credit available, you don't have to check with the bank before giving yourself a loan.
Just remember that your home is on the line for this type of loan. Failure to repay can result in foreclosure, so you do not charge an evening's entertainment to this account.
English said First Union also offers a "tax wise" car loan. You sign a deed of trust against your home for a loan of up to $20,000 for a period of five years or less, thus making the interest tax deductible. But on this loan you do not have to pay for such costs as a title search and appraisal, only the filing fee at the courthouse, typically $40 to $60.
The interest rate varies, but last week it was 8.74 percent. If you were in the 31 percent rate bracket, the rate after the tax deduction would be 6.03 percent.
Another resource may be your life insurance if you have the type of policy that builds cash value such as whole life or universal life.
James A. Ford, an agent in Roanoke for Northwestern Mutual Life Insurance Co., said policyholders can borrow 92 percent to 94 percent of the cash value. The company holds back some money to pay the interest in case the policyholder fails to pay.
The typical interest rate on such loans is 8 percent, he said, although it may be only 5 percent or 6 percent on policies dating back to the early 1970s and earlier. Ford said many companies offer the alternative of a floating rate tied to the Moody's Bond Index or similar indicator.
You can pay the interest without ever paying back the amount you borrowed, but the loan would be deducted from the payoff on the policy when you die. The policy will "self-destruct" if you don't pay the interest, however, Ford said.
If you are in business for yourself and use the proceeds for a business purpose, Ford said, the interest would be tax-deductible.
Ford recommends that his clients borrow against their life insurance only in an emergency. Otherwise, he said, the interest is expensive. Meanwhile, the policy isn't building in value.
Anyone with a margin account at a brokerage house has another ready source of funds based on his or her own assets.
Peter Milward, manager of the Roanoke office of J.C. Bradford & Co., said stocks, mutual funds and all types of bonds can be held in a margin account. You can borrow up to 50 percent of the value of the securities in the account.
The interest rate varies every week, but last week borrowers paid 10 percent on amounts under $25,000, 9.25 percent on amounts under $100,000, 8.75 percent on amounts over $100,000, and 8.5 percent on amounts over $500,000.
An advantage is that the brokerage will write you a check immediately if you have that type of account.
But there is great risk in such an arrangement. If the market declines and the equity in the account falls from 50 percent to less than 30 percent, the broker will call on you to put up cash or more securities. You and the broker are legally required to keep the collateral at 30 percent or more.
Milward said borrowing against your securities makes sense only when you need quick money for a week or so. The market is unlikely to fall very far in just a few days.
The usual reason for borrowing on margin, according to Milward, is to finance purchase of a stock that the customer believes will rise quickly. The customer buys the stock, makes a fast profit, sells the stock and repays the loan.
But if that stock should fall, he said, too many people stay on margin for months, hoping to at least break even. Meanwhile, the customer is paying interest and is at risk of a call to bolster the account.
The second most popular reason for borrowing is to pay a tax bill when the person doesn't want to sell securities.
"I've never been in favor of trading on margin," Milward said. He recommends that customers invest cash in good stocks for the long term.
Another source of money might be your 401(k) plan at work, according to the Virginia Society of Certified Public Accountants.
If your plan permits it, the society said, you can generally borrow up to 50 percent of the assets in your fund, up to the federal limit of $50,000.
You are in effect paying yourself for this loan. Rates are usually a point or two above the prime rate, which is currently 8.25 percent, and the interest you pay is credited to your own account.
Federal law requires you to repay the loan in full within five years, although loans used to buy a primary residence have a longer repayment period. Failure to pay off your loan within this period makes it a taxable distribution in the eyes of the Internal Revenue Service. That means you'd be required to pay income taxes on the outstanding loan balance plus a 10 percent early distribution penalty if you are under the age of 591/2.
If you have assets you would rather not sell, you can use them to reduce your interest rate if you borrow from a bank.
English said the interest rate on an unsecured loan might run as high as 16 percent. If you assign the title to your car, he said, the rate would range from 10 percent to 11.5 percent. But if you put up securities such as stocks, bonds and mutual funds, you would pay 9.9 percent.
The CPAs recommend that you borrow only when absolutely necessary and that you limit your debt payments (excluding your home mortgage or housing costs) to 20 percent of your after-tax income.
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