With interest rates on the rise, many people are choosing to remodel their existing homes rather than try to move. When clients want to repair or upgrade their current home, they have several options to choose from when it comes to financing the project.

Let’s take a look at a specific example.

All seated, a young man points to a tablet while a man and woman look on.

Mark and Elaine are planning to renovate their home.

Budget: The most they plan to spend on the project is $250,000, but they have an investment portfolio worth $400,000.

Situation: They currently have an outstanding mortgage of $300,000 on their home, which is valued at $850,000. Mark and Elaine file their taxes jointly and have an adjusted gross income (AGI) of $175,000.

Their options

Personal loan — This often comes with a higher interest rate than other lending options and typically is capped at a maximum of $100,000.

Liquidating assets — Withdrawing a portion of a non-retirement portfolio of stocks and bonds to pay for the renovation could impact long-term financial goals.

Home equity lines of credit (HELOC) or home equity loan — This involves borrowing a portion of the home’s value minus what is currently owed on the mortgage; whether they get a line of credit or a loan will determine the interest rates and how long they have to repay.

Securities-backed lending (SBL) — This allows borrowing against the value of their non-retirement portfolio without disrupting their investment strategy.

Breaking it down

The cost of liquidating

If Mark and Elaine chose to liquidate appreciated investments to finance the renovation, the costs would be significant when factoring in the tax they’d pay on capital gains and the loss of asset growth associated with potential long-term market gains.

The cost of liquidating

Liquidation total: $250,000
Capital gains: $129,650
Capital gains tax: $19,448
Return opportunity tax: $84,022
Cost of liquidating: $103,4701

As you see, liquidating is a costly choice.

Using a HELOC

Because Mark and Elaine own their home, they could borrow against its value with a home equity line of credit (HELOC). While this is a common funding option for homeowners who wish to make renovations or improvements, it may not always be the best option. With the current HELOC interest rate hovering at 8.13%, here is what the couple could expect:

The total cost of funding the home improvements with a HELOC is $60,975.2

Given the couple’s situation, the interest from the HELOC might be tax deductible, but there is another option that might be an even better choice.

Using securities-backed lending

By tapping into the power of their non-retirement investment portfolio, Mark and Elaine can access the funds they need for the renovation while keeping their portfolio intact and working for their longer-term needs. Securities-backed lending is a faster, low-hassle alternative to a HELOC and typically comes with a lower interest rate, too.

The couple qualified for a $250,000 securities-backed line of credit at a 1-month Secured Overnight Financing Rate of 5.06% plus 2.50%, which puts the all-in rate at 7.56%. The total cost of funding the improvements with SBL would be $56,700, which is $4,275 less than a HELOC.3

Savings with SBL

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$60,975

After-tax cost with HELOC

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$56,700

The total cost with SBL

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=$4,275

Savings with SBL

In addition to the cost savings, here are other benefits associated with using SBL:

  • Flexible, interest-only repayment — There are no rigid payment schedules
  • Less time-consuming — With SBL you can access funds in as little as a few days versus a HELOC that takes several weeks or over a month to close
  • No fees — There are no fees associated with setting up SBL, so you avoid costly fees and closing costs, which can be as high as 2% to 5% of the total funds borrowed
  • No early payoff penalties — Some HELOCs have penalties for paying off the loan early; SBL does not

Mark and Elaine make the smart choice and use SBL to fund their home project.

To calculate your client’s specific lending needs, try our Capital Cost Comparison calculator that shows a side-by-side comparison of using liquidation, a HELOC or SBL to access cash.

[1] Cost of liquidating: The cost of liquidating is the sum of the capital gains tax and the return opportunity cost.

Capital gains tax: An estimate of capital gains tax liability is based on adjusted gross income, tax filing status, and cost basis in investments. Cost basis was calculated by assuming the funds have been invested in the S&P 500® for the past 9 years. Taxes are based on the IRS income tax rates for the current tax year.

Return opportunity cost: Based on how much their investments would have appreciated in value over the 3-year holding period if they achieved the average yearly rate of return of the S&P 500 since 1969, which is 10.14%.

[2] HELOC: The HELOC periodic rate and annual percentage rate are based on available terms as published by Bankrate.com. The HELOC rates provided are for 05/11/2023. HELOC interest expense is calculated by multiplying the outstanding balance by the average HELOC rate for a holding period of 3 years. The periodic rate is based on a 90% loan-to-value and good credit. Nationwide does not offer HELOCs.

[3] Nationwide Smart Credit℠: Nationwide Smart Credit is a securities-backed line of credit. All rates are subject to change without notice and may vary. The interest rate and annual percentage rate for Nationwide Smart Credit is variable and may increase. The rate is based on the standard rate sheet as of 05/11/2023. SBL interest is calculated by multiplying the outstanding balance by the average HELOC rate for a holding period of 3 years.

All credit advances will bear interest at a variable rate based on an index plus a margin. The index is the 1-Month Term Secured Overnight Financing Rate ("SOFR") as published by the CME Group each Monday morning (the "Index"). The margin is a percentage which is determined by the total loan amount at origination (the "Margin").

Nationwide calculates the interest charges for each billing period by first determining the interest charge for each day in the billing period and then totaling the interest charges for all days in the billing period. The interest charge for each day of the billing period will be calculated by multiplying the daily balance for that day by the applicable interest rate in effect that day and dividing the resulting amount by 360. The daily balance for each day is equal to the beginning outstanding balance for that day, plus all new credit advances taken that day, less any payments or credits that are applied to reduce the outstanding balance.

Representatives do not give legal or tax advice. An attorney or tax advisor should be consulted for answers to specific questions.

The purpose of a Nationwide Smart Credit line of credit must be for personal, family or household purposes and not for securities investments or to purchase or carry margin securities, which include: (1) stocks that are registered on a national securities exchange, or any over-the-counter security designated for trading in the national market system; (2) debt securities (bonds) that are convertible into margin stock; and (3) shares of most mutual funds.

California: Loans made or arranged pursuant to a California Lenders Law License. Delaware: Nationwide SBL is licensed by the Delaware State Bank CCL commissioner to engage in business in this State under license number 035414, expires 12/31/2024. Maryland: License Number 1804109. Missouri: Consumer Credit Loan Company registered by the Missouri Division of Finance, license number 367-23-8932. Oregon: License number 1804109. Rhode Island: Rhode Island Licensed Lender. Washington: License number CL-1804109. Click here for state license information and rate and fee disclosures.

Not available in Mississippi, Montana, Nevada, and Vermont.

Nationwide, the Nationwide N and Eagle, Nationwide Smart Credit and Nationwide is On Your Side are service marks of Nationwide Mutual Insurance Company.
Nationwide SBL, LLC dba Nationwide Smart Credit (NMLS): 1804109 NMLS Consumer Access: https://www.nmlsconsumeraccess.org/
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