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HELOC vs. Portfolio Loan: Which is Right for You?

When it comes to leveraging the value of your assets, two common options arise: a Home Equity Line of Credit (HELOC) and a Portfolio Loan. While both options offer flexible borrowing opportunities, they have key differences that make one more suitable depending on your financial situation and goals. Here’s a breakdown to help you decide which might work best for you.

Portfolio Loan Overview

A Portfolio Loan is a flexible credit line tied to a taxable (non-retirement) portfolio. The loan amount can range from 50-60% of your portfolio’s value, and it’s generally very easy to set up, with minimal paperwork required.

Key characteristics of portfolio loans:

  • Variable interest rates: The rates typically range from 1.5% to 4.0% above the Fed Funds Rate, depending on the size of the loan that you take.
  • Loan amount: Generally, you can borrow up to 50-60% of your portfolio’s value, but this could be lower depending on the composition of the portfolio.
  • Payment flexibility: There is no fixed payment schedule, and interest is calculated daily for any outstanding loan amount.
  • Risk: If the value of your portfolio decreases, you may face a margin call, which could lead to the automatic liquidation of assets and potential tax liabilities.
  • Setup costs: No costs to set up, and the interest is typically tax-deductible up to your net investment income. If your interest exceeds your net investment income, the balance can be carried forward and reduce your tax bill in future years.

HELOC Overview

A Home Equity Line of Credit (HELOC) allows you to borrow against the equity in your home. The loan size can go up to 80% of your home’s value, minus any existing mortgage balance.

Key characteristics of HELOCs:

  • Variable interest rates: Typically similar to portfolio loans but depend on factors such as credit score, loan-to-value ratio, and home location.
  • Loan amount: Borrow up to 80% of your home’s value, minus the mortgage balance.
  • Draw and repayment periods: During the draw period (5-10 years), payments are usually interest-only. After that, during the repayment period (10-20 years), payments include both interest and principal.
  • Setup process: More involved compared to a portfolio loan. It often requires appraisal, credit checks, and income verification.
  • Tax benefits: Interest on the loan can be tax-deductible if the funds are used for improvements on the property for which the equity is the source of the loan. However, this tax benefit is capped at $750K of total loan value and includes all other tax-deductible mortgage interest as well.

Which One Should You Choose?

  • Portfolio Loans are best for individuals with significant non-retirement investment assets who want quick and easy access to funds without the need for extensive setup processes. However, they come with risks, especially if the market turns and your portfolio value drops.
  • HELOCs are ideal for homeowners with significant equity who need more structured borrowing for home-related expenses. While the setup process may be longer, the potential tax benefits and structured repayment period make it a sound choice for larger home improvement projects.

Conclusion

Both HELOCs and Portfolio Loans offer unique advantages, but choosing between them depends on your financial situation, risk tolerance, and borrowing needs. Feel free to get in touch if you want help determining which option is best for you.

 

Picture of Mark Haser, M.B.A., CFP®
Mark Haser, M.B.A., CFP®
Mark is a Partner and Wealth Advisor with Artemis Financial Advisors LLC. He has an MBA from Boston College’s Carroll School of Management and is a Certified Financial Planner (CFP®) professional. Mark helps physicians and high-income families to optimize their cash flow, minimize taxes, and build a plan for long-term financial success.

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