Found some 2.78% Money to Refinance my Boat Loan

[320Bob]

Since there have been a thread or two recently about the hassels and cost of boat loans these days I thought I would share an option that might be availlable to those of you with some non-IRA/401(k) portfolios. I was talking with my Merrill Lynch broker a month or so ago, who was trying to get more of my business, and he asked if there was any thing I might be interested in. Knowing that ML is own by Bank of America, who is one of the few large banks these days that makes boat loans, I said "How about a loan for my Boat?" He said "How does 2.78% sound?" My reply was "A lot better than my 6.37% with SunTrust!"

ML offers a LMA (Loan Management Account) which requires one to put up stocks and bonds as collateral against the loan. The special rate they offer to preferred customers is LIBOR (London Interbank Overnight Rate) plus around 2.5%. As of June 1 the rate on my loan was 2.68% and will fluctuate as the LIBOR rate goes up and down which entails some level of risk versus the normal fixed rate boat loan that I replaced. IRA accounts are not elgible to be collateral for this type of loan and the amount required to pledge is around 2 times the loan value.

For me, this reduced my monthly loan payment by close to $200 and the total amount of interest paid over the life of the 15 year load by $25,000. The monthly minimum payment is the interest but I plan to treat it like any other installment loan and pay both principal and interest each month. Most likely the interest will not be deductible for taxes since the boat is not the collateral but my after tax cost is 1.7% less than the SunTrust tax deductible loan. Also, I now will hold the title to the boat instead of the bank.

This may not be an option for some but for those that have financial investments and a brokerage firm that offers a similar type of credit line, it might be worth considering. If you have an account with Merrill Lynch, and interested in this option, I can give you my contact if you PM me.

 

[tbirdvet]

I would not expect the interest rate to stay this low for 15 years so be very careful. This is similar to an ARM for a home which can catch one off guard down the road.

 

[Gofirstclass]

If I'm reading this correctly, you pledged your family's future financial security in an amount that's twice the value of a depreciating toy you own, at a time in our nation's recent history when the LIBOR (and other interest rates) are at historical lows, and we know they're going to go up as the economy turns around? And you did this all to save $200 a month????? :smt021

Sorry to have to ask this question, but what happens if you lose your job (or your life in an accident???) or have some other financial calamity that forces you to give the boat back to BofA? Could you possibly end up with having to forfeit the investments you worked so hard to accumulate so that you can keep a depreciating toy asset (your boat)? :huh:

I'm a retired financial advisor and would never, ever recommend to a client that they use their future financial security (their investments) as collateral for a loan?

My only question would be this??? Was your ML broker truly acting in your best interest, or simply using you to earn a huge commission on a banking product they offer because B oof A requires them to push banking products in addition to investment products?

 

[Searaybio270]

If I remember correctly. the Libor rate moves very slow both up and down. Not to the same ratio as regular ARM loans. I had client with the LIBOR and when an ARM rate was 6 to 7% they were still at 2.5% or 3%. I think the COFI rates work the same way. Now I am not saying what the ML guy did was in the best interest but he has a better chance of paying of the loan by doubling up now than at the 6.37%. That savings of $200 a month can go to paying off the boat or investing it at something higher than 2.78% or ???
JMHO

 

[floriduramax1]

Subscribing!

 

[320Bob]

If I'm reading this correctly, you pledged your family's future financial security in an amount that's twice the value of a depreciating toy you own,... And you did this all to save $200 a month????? :smt021

Sorry to have to ask this question, but what happens if you lose your job (or your life in an accident???) or have some other financial calamity that forces you to give the boat back to BofA? Could you possibly end up with having to forfeit the investments you worked so hard to accumulate so that you can keep a depreciating toy asset (your boat)? :huh:...I'm a retired financial advisor and would never, ever recommend to a client that they use their future financial security (their investments) as collateral for a loan?...

GFC you have not seen my balance sheet which would tell quite a different story. If the pledge account value were 50% of my retirement savings then I would tend to agree with you. But it's more like ten times less than this amount. I have posted before that I am a believer in strategic use of leverage where I can earn more on my capital that it costs me to borrow the same amount which is the case here. I am one of the owners of the firm I work for so I am not that concerned about loosing my job and I have more than adequate insurance to cover my health, death, or personal liability so I am not too worried about my future unless the current administration screws it up for everyone in the future.

This probably not an option for many boat owners but for those that have a substantial portion of their wealth in fianacial versus real estate assets I believe this could be a very effective use of leverage to buy a boat. I have been uniformly disgusted with the risk premium charged on boat loans compared to home mortgages and auto loans. Boat loans on brand new boats are considerably cheaper than on used boats which is another reason I am disgusted and believe the rates are irrationally high compared with a home mortgage for a similar term and down payment percent. I have 2.5% available on my home equity credit line (house paid off), 1.7% on my recent auto loan and now 2.68% instead of 6.37% on my boat loan. If the interest rate basis for either the credit line or LMA increase to the point of exceeding my marginal rate of return then I will pay them off. Until then I will continue to take advantage of the difference.

If I remember correctly. the Libor rate moves very slow both up and down. Not to the same ratio as regular ARM loans. I had client with the LIBOR and when an ARM rate was 6 to 7% they were still at 2.5% or 3%. I think the COFI rates work the same way. Now I am not saying what the ML guy did was in the best interest but he has a better chance of paying of the loan by doubling up now than at the 6.37%. That savings of $200 a month can go to paying off the boat or investing it at something higher than 2.78% or ???
JMHO

Searaybio270 you definitely get it. In the first 5 years of this new loan with a $200 per month lower payment, I will have paid almost 5 times as much principal as with the 6.37% loan and paid 2.5 times less interest.

 

[JVM225]

Most brokerage accounts offer this type of loan from your margin account, and the interest rates are not only often favorable, but you might be eligible for a tax deduction on the interest paid too.
I've taken advantage of this benefit several times over the years when I needed short term cash and didn't want to liquidate any assets to get it. Luckily, it has always worked out for me and resulted in some earnings.
Again though, I've done it for short term cash. I don't know how comfortable I'd be exercising this option for a long period of time. You're essentially borrowing money to keep money invested without knowing the adjustable interest rate over a long period of time, or the future value of the investments you are borrowing against. Should the value of the investments decrease, you could wind up in a bad situatuion.
But I recognize that everyones situation and investment philosophy is unique to the individual, so congratulations and I hope it works out for you.

 

[alnav]

One issue with this loan may be the loss of the second home deduction since the loan is now against securities vice the boat. But, if you're subject to AMT you wouldn't get the second home deduction anyway.

 

[320Bob]

One issue with this loan may be the loss of the second home deduction since the loan is now against securities vice the boat. But, if you're subject to AMT you wouldn't get the second home deduction anyway.

I am subject to AMT which is another reason I went this route.

 

[Gofirstclass]

320Bob, in your situation making the move you did sounds like it makes sense. I suspect most CSR members are not in your situation and for them, it might not have been a wise move.

GFC