Hi everyone,
I ran into a situation that is almost exactly like the one MMM discusses in the margin loan posting, and I am trying to understand the math. Here is a situation:
I found a good house for sale for about USD 277K. Add closing costs and all that crazy stuff, and let's call it 300K.
Currently, I have 800K in equities (VOO), and 100K in treasuries. I also have about 50K in cash.
IB tells me this:
Portfolio Initial Margin USD $79,725.12
Reg-T Initial Margin USD $402,882.12
Portfolio Maintenance Margin USD $72,477.38
Reg-T Maintenance Margin USD $201,441.06
If I borrow all 300K against the 800K equities position, what happens? Is the below right?
1. My equities portfolio value drops to 500K.
2. I am very close to the Initial Margin, not so close to the Maintenance Margin.
What I don't quite understand is where the "oh, shit!" level kicks in. Is it when the equities portfolio value hits ~402 (i.e a 12.5% drop in the value of my VOO equities), or is it when it hits ~201 (i.e. a drop of more than 30%)? I have no idea what the Portfolio Maintenance Margin means, so I am even less comfortable.
Realistically, I am unlikely to take this plunge because there are non-financial considerations at play, but I will eventually want to buy something (most likely something cheaper) and this is a question that keeps recurring to me. Also, unless I understand how this stuff works, I am not going near margin loans. I can also buy a 50k house and be happy. Bad location for everyone else, paradise for me.
Also, I am not in the US, so other sources of financing are not available at interest rates that make any sense (over 10% currently). Cheap housing prices giveth, the banks taketh away.
Feel free to punch. I would rather get them here than in my wallet.