Help me figure out the right down payment on a condo
April 27, 2021 11:47 AM Subscribe
My wife and I have just signed a purchase contract on a condo in a smaller European city with a dynamic, growing economy and rising home prices. We have about two months to decide on the shape of our mortgage and size of our down payment, and, as a first-time home-buyer, I would appreciate some advice.
The target handover date is the end of August, so we have some time to figure things out. We've already been approved for a mortgage by more than one bank, so now I'm just trying to figure out what the details should be.
Data:
- Purchase price is 350K (all figures in Euros).
- My wife and I have 120K in savings, and I expect we'll have 140-150K in savings by the time we need to pay the purchase price into the escrow account.
- My wife and I have no debts, and we save an average of 2.5K per month right now.
- Our monthly costs will go up about 800 Euros when we become homeowners, given the current mortgages for which we've been approved.
- My wife's mom will loan us 80K at no interest.
- The mortgages we've gotten approvals for assume a 140K down payment (80K from M-I-L, 60K from us), a 20-year fixed interest rate between 1.125% and 1.5%, and a 5-year adjustable rate period at the end.
- The condo is in great shape and doesn't require any major repairs at this time, but we'll probably spend around 10-20K on moving, painting, putting in some minor updates and buying some furniture.
- Based on comparable sales, I think the condo is actually worth around 400K, maybe a little more. I've had others who are familiar with the local market and are real estate adjacent tell me the price is significantly lower than they would have expected.
To simplify - if we have 150K savings when we have to pay into escrow and put 20K into moving and upgrades, we'll be left with 70K in the bank. Should we increase the size of our down payment or do anything else differently?
We plan to live in the new condo for the foreseeable future - probably at least 20 years, maybe even 40.
The target handover date is the end of August, so we have some time to figure things out. We've already been approved for a mortgage by more than one bank, so now I'm just trying to figure out what the details should be.
Data:
- Purchase price is 350K (all figures in Euros).
- My wife and I have 120K in savings, and I expect we'll have 140-150K in savings by the time we need to pay the purchase price into the escrow account.
- My wife and I have no debts, and we save an average of 2.5K per month right now.
- Our monthly costs will go up about 800 Euros when we become homeowners, given the current mortgages for which we've been approved.
- My wife's mom will loan us 80K at no interest.
- The mortgages we've gotten approvals for assume a 140K down payment (80K from M-I-L, 60K from us), a 20-year fixed interest rate between 1.125% and 1.5%, and a 5-year adjustable rate period at the end.
- The condo is in great shape and doesn't require any major repairs at this time, but we'll probably spend around 10-20K on moving, painting, putting in some minor updates and buying some furniture.
- Based on comparable sales, I think the condo is actually worth around 400K, maybe a little more. I've had others who are familiar with the local market and are real estate adjacent tell me the price is significantly lower than they would have expected.
To simplify - if we have 150K savings when we have to pay into escrow and put 20K into moving and upgrades, we'll be left with 70K in the bank. Should we increase the size of our down payment or do anything else differently?
We plan to live in the new condo for the foreseeable future - probably at least 20 years, maybe even 40.
I think the condo is actually worth around 400K, maybe a little more.
Do you have any sense of why the condo went for 50K under what it's worth? That would raise some alarm bells about possible repairs needed that weren't caught. However, that's coming from the perspective of being in a very competitive sellers' market where people are waiving inspections and sellers are wringing every bit of value out of sales. So depending on how competititve your local market is, you may want to keep some more money available (ie, not in a down payment) in case you need to spend it on the condo.
Also, with such a low interest rate, it seems like you might be better off investing that money.
posted by lunasol at 11:58 AM on April 27, 2021 [8 favorites]
Do you have any sense of why the condo went for 50K under what it's worth? That would raise some alarm bells about possible repairs needed that weren't caught. However, that's coming from the perspective of being in a very competitive sellers' market where people are waiving inspections and sellers are wringing every bit of value out of sales. So depending on how competititve your local market is, you may want to keep some more money available (ie, not in a down payment) in case you need to spend it on the condo.
Also, with such a low interest rate, it seems like you might be better off investing that money.
posted by lunasol at 11:58 AM on April 27, 2021 [8 favorites]
Why do you want to put more money down? I feel like I'm missing something. The state of the local market, how long you plan to live in the condo, etc. are all irrelevant to this question to first order.
Unless mortgages, home ownership and investments work very differently in your country to mine (which is possible, and it might be worth saying what country you live in!), you should put the least amount down that the banks will allow. This feels extra true now because mortgage rates are so low, but historically it is pretty much always true, because you earn more money by investing money than you save by paying off your mortgage early, whatever the prevailing interest rates. Very roughly, if that wasn't true, banks would lose money.
You should certainly not increase your 40% down payment. In fact you should ask the bank if they'll issue the loan with less than 40% down. In the US 20% down is usually enough to get the best possible interest rate from a bank. Any more than that and they'll be more than happy to take your money without reducing the interet rate.
Putting more down than you have to is an expensive mistake that trades a vague feeling that you own more of the property for significant investment income and/or the freedom/security that comes with cash in the bank.
The only situations in which it sometimes makes sense is if you don't trust yourself not to waste the cash while it sits there earning you money, or you are extremely risk averse to an extent that you're fine spending a lot of money (probably tens of thousands of euros, but it depends on where you live, what local tax rates are, the historical returns of investments, etc.) to eliminate risk.
posted by caek at 12:03 PM on April 27, 2021 [4 favorites]
Unless mortgages, home ownership and investments work very differently in your country to mine (which is possible, and it might be worth saying what country you live in!), you should put the least amount down that the banks will allow. This feels extra true now because mortgage rates are so low, but historically it is pretty much always true, because you earn more money by investing money than you save by paying off your mortgage early, whatever the prevailing interest rates. Very roughly, if that wasn't true, banks would lose money.
You should certainly not increase your 40% down payment. In fact you should ask the bank if they'll issue the loan with less than 40% down. In the US 20% down is usually enough to get the best possible interest rate from a bank. Any more than that and they'll be more than happy to take your money without reducing the interet rate.
Putting more down than you have to is an expensive mistake that trades a vague feeling that you own more of the property for significant investment income and/or the freedom/security that comes with cash in the bank.
The only situations in which it sometimes makes sense is if you don't trust yourself not to waste the cash while it sits there earning you money, or you are extremely risk averse to an extent that you're fine spending a lot of money (probably tens of thousands of euros, but it depends on where you live, what local tax rates are, the historical returns of investments, etc.) to eliminate risk.
posted by caek at 12:03 PM on April 27, 2021 [4 favorites]
Response by poster: lunasol: The discounted price seems to be related to the complicated situation the seller is in:
1. He needs to sell the condo in order to pay a divorce settlement to his ex-wife.
2. His ex-wife is living rent-free in the condo, and they've asked buyers to give her until the end of August to find a new place and move out.
3. There's a small but non-zero chance his ex-wife could decide to stay, in which case getting her out could take up to 6 more months.
4. He's 75 and has had a difficult time showing the apartment while his wife is still in it (working around her schedule, etc., plus her comfort level with people coming in for showings during COVID).
5. He wants to sell it to a family and not an investor - he has a good relationship with his ex-neighbors in the building, and doesn't want it turned into an AirBnB or else sold or rented out to someone who'd cause problems for the neighbors.
We're not in a hurry to move, and the sales contract allows us to back out if his ex-wife doesn't leave on time, but we have met her. She's commuting to a new job in a different city now, and the place is too large for a single person. Plus, she won't get her settlement until she moves out.
caek: We're in Austria. My wife is super conservative with money and debt, and I've also grown to like the feeling of not having any debts. I think it'd feel great to have a low monthly payment and hopefully pay the place off within 10 years or so, but I get that the opportunity cost is high.
posted by Strumpf Marionette at 12:17 PM on April 27, 2021 [2 favorites]
1. He needs to sell the condo in order to pay a divorce settlement to his ex-wife.
2. His ex-wife is living rent-free in the condo, and they've asked buyers to give her until the end of August to find a new place and move out.
3. There's a small but non-zero chance his ex-wife could decide to stay, in which case getting her out could take up to 6 more months.
4. He's 75 and has had a difficult time showing the apartment while his wife is still in it (working around her schedule, etc., plus her comfort level with people coming in for showings during COVID).
5. He wants to sell it to a family and not an investor - he has a good relationship with his ex-neighbors in the building, and doesn't want it turned into an AirBnB or else sold or rented out to someone who'd cause problems for the neighbors.
We're not in a hurry to move, and the sales contract allows us to back out if his ex-wife doesn't leave on time, but we have met her. She's commuting to a new job in a different city now, and the place is too large for a single person. Plus, she won't get her settlement until she moves out.
caek: We're in Austria. My wife is super conservative with money and debt, and I've also grown to like the feeling of not having any debts. I think it'd feel great to have a low monthly payment and hopefully pay the place off within 10 years or so, but I get that the opportunity cost is high.
posted by Strumpf Marionette at 12:17 PM on April 27, 2021 [2 favorites]
caek: We're in Austria. My wife is super conservative with money and debt, and I've also grown to like the feeling of not having any debts. I think it'd feel great to have a low monthly payment and hopefully pay the place off within 10 years or so, but I get that the opportunity cost is high.The "logical" thing to do is to put the least amount possible down. You can make the higher monthly payment using the money you didn't tie up in the mortgage, and you can buy the place outright in ten years if you want to. In fact you can buy the place outright sooner the less you put down, assuming you invest the money. But I understand the impulse. Investments with non-zero risk are not for everyone, and having lived in Munich I know the financial culture around home ownership is different in that part of the world. So you should do what makes you feel comfortable.
I'll make one last effort to convince you to investigate putting less down: run the numbers assuming your investments make X%. I don't know what X is in Austria. Suppose it's 3% after tax, which would be on the low end in the US. Putting 20% down (EUR 70K) saves you about EUR 25K in interest payments at a 1.5% mortgage rate. But if you can earn 3% on that money instead of putting it in the mortgage, you'll make about EUR 55K. So the warm fuzzy feeling of owning more of your home (but still not 100%) is literally going to cost you EUR 30K. And you also lose the flexibility to use that EUR 70K you have invested in an emergency if it's tied up in home equity. Of course the value of X is the question but like I say it's pretty much guaranteed to be greater than your historically low, fixed mortgage rate on average over a timespan like 20 years.
There are case I can make for putting more down, but they're edge cases. One is relevant if you expect to pay the loan off early, check the terms of the mortgage carefully. There is often a penalty for this. And the penalty is often proportional to the remaining balance on the mortgage. So paying off early may cost you more if you originally made a smaller downpayment. (Obviously, I don't think anyone should pay their loan off early, but that's a separate issue!)
The other is sometimes an issue in condominium associations in the US. The condo board sometimes requires more down as a demonstration of financial fitness (or, in practice as a legal pretext to keep ... shall we say "demographically undesirable" people out of the building). If this applies to you then you don't get any say in the matter, but you may end up having to put 50% or more down.
posted by caek at 12:32 PM on April 27, 2021 [4 favorites]
Thanks for that additional info! This is the one thing that would give me financial pause:
2. His ex-wife is living rent-free in the condo, and they've asked buyers to give her until the end of August to find a new place and move out.
3. There's a small but non-zero chance his ex-wife could decide to stay, in which case getting her out could take up to 6 more months.
If you're dealing with the possibility of having to pay rent+mortgage for up to six months, then having more cash would probably be nice. As others have said, you could even make extra payments on your mortgage to make up the difference. But with such a stupid low mortgage rate, it really does not make sense, even for a very debt-averse person, to pay such a big down payment. (And to be clear, there's risk on both sides. One on side, you are somewhat locking yourself into higher monthly payments, but on the other side, you're removing some of your liquidity. Though I suppose the latter is probably less of a concern in a country with an actual social safety net, unlike the US.)
posted by lunasol at 12:44 PM on April 27, 2021 [1 favorite]
2. His ex-wife is living rent-free in the condo, and they've asked buyers to give her until the end of August to find a new place and move out.
3. There's a small but non-zero chance his ex-wife could decide to stay, in which case getting her out could take up to 6 more months.
If you're dealing with the possibility of having to pay rent+mortgage for up to six months, then having more cash would probably be nice. As others have said, you could even make extra payments on your mortgage to make up the difference. But with such a stupid low mortgage rate, it really does not make sense, even for a very debt-averse person, to pay such a big down payment. (And to be clear, there's risk on both sides. One on side, you are somewhat locking yourself into higher monthly payments, but on the other side, you're removing some of your liquidity. Though I suppose the latter is probably less of a concern in a country with an actual social safety net, unlike the US.)
posted by lunasol at 12:44 PM on April 27, 2021 [1 favorite]
Response by poster: caek: In Austria, there's a max 1% penalty (most banks charge the max) for prepaying more than 10K of your mortgage every 12 months during the fixed interest phase (20 years in the mortgages we've qualified for already). There's no penalty for prepaying once you reach the variable rate phase.
In other words, we can prepay up to 10K per year without penalty for the first 20 years of the loan. Paying the whole thing off during the fixed phase would trigger a penalty, but the penalty would be less than we would have otherwise paid in interest, had we not prepaid.
The situation is different in Germany, where prepaying during the fixed phase often nets you a penalty that is significantly more costly than the interest would have been.
It seems like it would be nice to get the payment as low as possible, as early as possible, freeing up disposable income after that and improving the security of our financial situation, but I know it's deceptive. Now to see whether I can convince my über conservative (in all things financial) wife to stick whatever savings we don't put into the downpayment into a no-fee index fund. Wish me luck! :D
posted by Strumpf Marionette at 12:47 PM on April 27, 2021
In other words, we can prepay up to 10K per year without penalty for the first 20 years of the loan. Paying the whole thing off during the fixed phase would trigger a penalty, but the penalty would be less than we would have otherwise paid in interest, had we not prepaid.
The situation is different in Germany, where prepaying during the fixed phase often nets you a penalty that is significantly more costly than the interest would have been.
It seems like it would be nice to get the payment as low as possible, as early as possible, freeing up disposable income after that and improving the security of our financial situation, but I know it's deceptive. Now to see whether I can convince my über conservative (in all things financial) wife to stick whatever savings we don't put into the downpayment into a no-fee index fund. Wish me luck! :D
posted by Strumpf Marionette at 12:47 PM on April 27, 2021
Making a larger down payment than necessary can increase your risk rather than reduce it. Imagine a large, unexpected future expense. If the money is still in your bank account, you can pay it. If the money is tied up in your condo's equity, you might need to sell the condo, borrow again from a relative, or try to get a home equity loan in difficult circumstances (recession, unemployment).
posted by drdanger at 12:47 PM on April 27, 2021 [6 favorites]
posted by drdanger at 12:47 PM on April 27, 2021 [6 favorites]
Response by poster: lunasol: Fortunately, the contract allows us to back out if the ex-wife doesn't move out by August 31. It also allows us to extend the period if it seems like she'll be moving out shortly.
Basically, everyone's goals seem to be aligned:
1. The seller wants out of the condo, and wants to be able to pay his divorce settlement to get it off his back.
2. His ex-wife would like to be paid her divorce settlement, and would also like to move into a smaller apartment closer to her new job.
3. We would like to eventually own the apartment, but are not in a massive hurry.
I think this complication with the ex-wife's situation + the ask of a 4-month delay between signing a contract and getting the keys scared some other potential buyers off, but I'm also optimistic it will work out, and I feel secure knowing that we can just back out of the deal if it seems she's not going to move out in time.
posted by Strumpf Marionette at 12:51 PM on April 27, 2021
Basically, everyone's goals seem to be aligned:
1. The seller wants out of the condo, and wants to be able to pay his divorce settlement to get it off his back.
2. His ex-wife would like to be paid her divorce settlement, and would also like to move into a smaller apartment closer to her new job.
3. We would like to eventually own the apartment, but are not in a massive hurry.
I think this complication with the ex-wife's situation + the ask of a 4-month delay between signing a contract and getting the keys scared some other potential buyers off, but I'm also optimistic it will work out, and I feel secure knowing that we can just back out of the deal if it seems she's not going to move out in time.
posted by Strumpf Marionette at 12:51 PM on April 27, 2021
Response by poster: drdanger: Totally true. I had initially wanted to have a 2-year buffer in case of job-loss, illness or whatever, to give us time to sell or figure out another solution. I think, at the very least, that we won't raise the down payment any.
We may consider lowering it, but my M-I-L might not be cool with loaning us 80K for the down payment and having us end up with a condo plus 80K or more in the bank, if that makes sense.
posted by Strumpf Marionette at 12:55 PM on April 27, 2021
We may consider lowering it, but my M-I-L might not be cool with loaning us 80K for the down payment and having us end up with a condo plus 80K or more in the bank, if that makes sense.
posted by Strumpf Marionette at 12:55 PM on April 27, 2021
If you invest the money that you don't put in a down payment, you are increasing your income - if it's shares, for instance, the capital value goes up and you get dividends, either of both of which you could take and spend if you chose to (and some proportion of which would cover your mortgage payment).
There is a flow of cash, sort of, from the money you earn back into more investments, and the question of disposable income is really how much of that flow you divert into your pocket. (You could equally think of the money not taken out as a part of the money you're banking to your savings each month.)
I'm not saying you should or shouldn't do this; but the way you talk about your disposable income makes me think you haven't seen it in quite this way when considering your options, so maybe the perspective shift will help.
posted by How much is that froggie in the window at 12:57 PM on April 27, 2021 [1 favorite]
There is a flow of cash, sort of, from the money you earn back into more investments, and the question of disposable income is really how much of that flow you divert into your pocket. (You could equally think of the money not taken out as a part of the money you're banking to your savings each month.)
I'm not saying you should or shouldn't do this; but the way you talk about your disposable income makes me think you haven't seen it in quite this way when considering your options, so maybe the perspective shift will help.
posted by How much is that froggie in the window at 12:57 PM on April 27, 2021 [1 favorite]
Putting down more should lower your monthly payments, so I'm confused as to where the static "additional €800 per month" is coming from.
Personally, with an interest rate that low, I wouldn't borrow from your MIL. I'd just use your savings to put 25% down.
posted by DarlingBri at 12:59 PM on April 27, 2021 [1 favorite]
Personally, with an interest rate that low, I wouldn't borrow from your MIL. I'd just use your savings to put 25% down.
posted by DarlingBri at 12:59 PM on April 27, 2021 [1 favorite]
Response by poster: How much is that froggie: Appetite for investment in the stock market here (and especially with my wife's family) is low. I'm more willing, but a sure thing (paying down your debt) is a sure thing.
DarlingBri: We pay about €1200/month for rent right now.
At the new place, given the mortgages we've qualified for, we'll pay around €2000/month:
- €900/month mortgage payment.
- €500/month homeowner dues (maintenance fund, heating, water, etc.).
- €600/month to M-I-L.
posted by Strumpf Marionette at 1:10 PM on April 27, 2021
DarlingBri: We pay about €1200/month for rent right now.
At the new place, given the mortgages we've qualified for, we'll pay around €2000/month:
- €900/month mortgage payment.
- €500/month homeowner dues (maintenance fund, heating, water, etc.).
- €600/month to M-I-L.
posted by Strumpf Marionette at 1:10 PM on April 27, 2021
It seems like you really want to pay down the mortgage, but like everyone is saying, at interest rates of less than the nominal inflation rate, you are better extending your mortgage and doing other things with the money, even if they are purely consumptive.
Long mortgages are wonderful inflation hedges, as the only part that will increase is your homeowner dues.
If you just want to pay down your mortgage, feel free, but you are exchanging a really low long-term rate for piece of mind and ultimately less cash and possibly a loan with worse rates if something happens before you can replenish your cash supply.
FYI my fees are the same as yours and my interest rate is 2X as high (all in dollars and not Euros) and I've invested the difference at way higher than 3% a year.
posted by The_Vegetables at 1:22 PM on April 27, 2021 [3 favorites]
Long mortgages are wonderful inflation hedges, as the only part that will increase is your homeowner dues.
If you just want to pay down your mortgage, feel free, but you are exchanging a really low long-term rate for piece of mind and ultimately less cash and possibly a loan with worse rates if something happens before you can replenish your cash supply.
FYI my fees are the same as yours and my interest rate is 2X as high (all in dollars and not Euros) and I've invested the difference at way higher than 3% a year.
posted by The_Vegetables at 1:22 PM on April 27, 2021 [3 favorites]
I would like to further convince you of why you should MINIMIZE your mortgage down payment/investment.
I come from a family of very fiscally conservative people who HATE mortgages, because, "borrowing money is bad". Decades of advice have reinforced the idea that all debt is bad, and putting down as much as possible on a house is ALWAYS best. Some debt is bad, but that advice is really only useful if you are living paycheck to paycheck, or can't pay your bills.
But, something I didn't realize, is that the value of your house to you doesn't change based on how much money you have in the mortgage paid off. Whether you have 90% paid down, or 5% paid down, when you sell the house, you will get the entire value of the property written to you as a check.
So, regardless of everything else, in 10 years when you sell, you'll get a check for the value of the home. Let's say it goes up to 450K. It will pay off your loan, minus interest.
The value of the home isn't part of the equation. Your equity, at the time of sale, will not change your value.
Once you own the property (and meet the minimum down payment, etc), you should think of it as a comparison between bank accounts.
Account 1 has a guaranteed rate of return of 1.5% - and this money is inflation-disadvantaged (inflation makes your money less).
Account 2 has a rate of return of -5-10%, but averages +6% - and this money is inflation-advantaged (inflation will grow this money proportionally).
The advice you are receiving, and I agree with, is to put as little money into account #1, and as much money into account #2 as possible. I have bought and sold 2 houses, and I put down the minimum, and put it into index funds. As much money as possible. Over the last 3 years, I've grown ~50K to 100K by taking this strategy.
Last, I'm uncertain exactly what brokers are available in Austria, but often your Index Fund accounts can give you liquid cash within 48 hours - which, having a spare $100K in liquid cash is so much more impactful than saving $200/month on interest, that it just doesn't make any sense to put it against your mortgage.
Also, if your mother is able to give you that loan, she probably doesn't have it in an index fund either. Can you convince her to put her money in index funds before mega-inflation hits in the next few years?
posted by bbqturtle at 2:21 PM on April 27, 2021 [5 favorites]
I come from a family of very fiscally conservative people who HATE mortgages, because, "borrowing money is bad". Decades of advice have reinforced the idea that all debt is bad, and putting down as much as possible on a house is ALWAYS best. Some debt is bad, but that advice is really only useful if you are living paycheck to paycheck, or can't pay your bills.
But, something I didn't realize, is that the value of your house to you doesn't change based on how much money you have in the mortgage paid off. Whether you have 90% paid down, or 5% paid down, when you sell the house, you will get the entire value of the property written to you as a check.
So, regardless of everything else, in 10 years when you sell, you'll get a check for the value of the home. Let's say it goes up to 450K. It will pay off your loan, minus interest.
The value of the home isn't part of the equation. Your equity, at the time of sale, will not change your value.
Once you own the property (and meet the minimum down payment, etc), you should think of it as a comparison between bank accounts.
Account 1 has a guaranteed rate of return of 1.5% - and this money is inflation-disadvantaged (inflation makes your money less).
Account 2 has a rate of return of -5-10%, but averages +6% - and this money is inflation-advantaged (inflation will grow this money proportionally).
The advice you are receiving, and I agree with, is to put as little money into account #1, and as much money into account #2 as possible. I have bought and sold 2 houses, and I put down the minimum, and put it into index funds. As much money as possible. Over the last 3 years, I've grown ~50K to 100K by taking this strategy.
Last, I'm uncertain exactly what brokers are available in Austria, but often your Index Fund accounts can give you liquid cash within 48 hours - which, having a spare $100K in liquid cash is so much more impactful than saving $200/month on interest, that it just doesn't make any sense to put it against your mortgage.
Also, if your mother is able to give you that loan, she probably doesn't have it in an index fund either. Can you convince her to put her money in index funds before mega-inflation hits in the next few years?
posted by bbqturtle at 2:21 PM on April 27, 2021 [5 favorites]
FYI my fees are the same as yours and my interest rate is 2X as high (all in dollars and not Euros) and I've invested the difference at way higher than 3% a year.I pulled 3% out of thin air, so let me explain why.
Certainly it's usual to assume more than 3% return in the US (e.g. 7% before tax, 5% after tax), but 1) historically, private investors in Europe pay higher fees, get lower returns and payer higher taxes 2) OP sounds like they would prefer to invest conservatively.
posted by caek at 2:33 PM on April 27, 2021 [2 favorites]
"My wife's mom will loan us 80K at no interest."
"The mortgages we've gotten approvals for assume a 140K down payment (80K from M-I-L, 60K from us)"
"At the new place, given the mortgages we've qualified for, we'll pay around €2000/month:
"- €900/month mortgage payment.
"- €500/month homeowner dues (maintenance fund, heating, water, etc.).
"- €600/month to M-I-L."
I, too, think you should make a small down payment. A lot of people meet that payment with family assistance, but I also think you should avoid having a monthly fee owed to your M-I-L., if possible, as that can get sticky. (And while it would be an interest-free loan to you and your wife, it's not in her mom's best interest; bbqturtle makes an excellent point about that.)
posted by Iris Gambol at 3:15 PM on April 27, 2021 [2 favorites]
"The mortgages we've gotten approvals for assume a 140K down payment (80K from M-I-L, 60K from us)"
"At the new place, given the mortgages we've qualified for, we'll pay around €2000/month:
"- €900/month mortgage payment.
"- €500/month homeowner dues (maintenance fund, heating, water, etc.).
"- €600/month to M-I-L."
I, too, think you should make a small down payment. A lot of people meet that payment with family assistance, but I also think you should avoid having a monthly fee owed to your M-I-L., if possible, as that can get sticky. (And while it would be an interest-free loan to you and your wife, it's not in her mom's best interest; bbqturtle makes an excellent point about that.)
posted by Iris Gambol at 3:15 PM on April 27, 2021 [2 favorites]
I would like to mention a counter opinion to many above. I totally went for a larger down payment, even at a good interest rate. I know full well that in principle we could have paid less and potentially earned more if we invested that money. Heck I often overpay my mortgage principle, even though that goes against the simple min/max scheme many above are talking about. I have a PhD in math, I know how the numbers work. And I don't care.
Because I also know that optimization depends on a valuation. I like having a lower required payment. Wow did that feel good when the pandemic hit and I chose to run out my work contracts and become unemployed. I like the idea of owning my house fully, sooner. I also don't really like 'investment' as it's casually done. It's a hassle and a drain on my time and mental load. Can end up very exploitative and being part of the machine of maintaining harsh inequality. Not to mention that unless you really spend a lot of time and money to avoid it, your standard investment advice will put you heavily into fossil fuels and environmental destruction. And then the returns are a lot less attractive too .
I don't know if you care about that stuff. My main point is: don't pretend this is just about money and simple calculations. If you like and want the features of having lower payments and lower risks on your mortgage, it's ok to value that highly, naive calculus be damned.
posted by SaltySalticid at 3:35 PM on April 27, 2021 [11 favorites]
Because I also know that optimization depends on a valuation. I like having a lower required payment. Wow did that feel good when the pandemic hit and I chose to run out my work contracts and become unemployed. I like the idea of owning my house fully, sooner. I also don't really like 'investment' as it's casually done. It's a hassle and a drain on my time and mental load. Can end up very exploitative and being part of the machine of maintaining harsh inequality. Not to mention that unless you really spend a lot of time and money to avoid it, your standard investment advice will put you heavily into fossil fuels and environmental destruction. And then the returns are a lot less attractive too .
I don't know if you care about that stuff. My main point is: don't pretend this is just about money and simple calculations. If you like and want the features of having lower payments and lower risks on your mortgage, it's ok to value that highly, naive calculus be damned.
posted by SaltySalticid at 3:35 PM on April 27, 2021 [11 favorites]
I don't disagree with the main point of your post, SaltySalticid, but just to follow up on this, since I'd love for more people to know about the options:
Perhaps more importantly for this question: if you goal is to avoid your money going to fossil fuels, paying your mortgage off early by writing a bigger check to your mortgage lender is perhaps worst thing you could do, short of literally buying Chevron stock yourself.
posted by caek at 4:13 PM on April 27, 2021 [5 favorites]
Not to mention that unless you really spend a lot of time and money to avoid it, your standard investment advice will put you heavily into fossil fuels and environmental destruction. And then the returns are a lot less attractive tooIf you live in the US and are not restricted by your employer's selection, you can use Betterment's ESG fund for an all-in-one solution, or you can take the standard Vanguard advice but switch to their ESG funds. Avoiding fossil fuel energy stocks doesn't take any more time than investing in the entire market. It takes a tiny, tiny amount more money in fees.
Perhaps more importantly for this question: if you goal is to avoid your money going to fossil fuels, paying your mortgage off early by writing a bigger check to your mortgage lender is perhaps worst thing you could do, short of literally buying Chevron stock yourself.
posted by caek at 4:13 PM on April 27, 2021 [5 favorites]
The whole "you'll earn more in the market than you can save on interest" is only useful advice if that money would otherwise be in the market . If your alternative use would not be "dump it all in stonks, yee-haw", then go ahead and use it all as a down payment, assuming there'll be enough left for a safety cushion. Avoiding that interest is better than whatever rate you're getting in cash.
posted by Jobst at 6:08 PM on April 27, 2021 [5 favorites]
posted by Jobst at 6:08 PM on April 27, 2021 [5 favorites]
The whole "you'll earn more in the market than you can save on interest" is only useful advice if that money would otherwise be in the market .
At an interest rate above your country's standard inflation rate, this would be true. At 1.5%, that is false. You would make out even if you wasted your money on standard consumptive items, as long as they are items you would be purchasing anyways. Buying toilet paper would be a better purchase for example.
posted by The_Vegetables at 11:04 PM on April 27, 2021 [3 favorites]
Response by poster: Thanks for all of the great advice, so far!
I'm currently leaning toward keeping (but not increasing) the €140K down payment and accepting M-I-L's offer of the no-interest loan (this was purely a voluntary offer on her part - we did not ask her for assistance). The cash she intends to loan us is literally cash that she keeps at her home, so she's not even earning the fraction of a percent interest rate she'd get in an insured savings account right now. I'm not kidding when I say this family is extremely (sometimes probably to their detriment) averse to financial risk. She's not wealthy. She just has a good job, lives frugally, and distrusts the banks / financial system. Some of that is probably related to hearing stories about wartime privation from her mother, who is old enough to remember the hardships of WWII.
With the leftover €70K, we'll probably increase our furniture and fixture budget, and I'll see about sticking some of what remains in an index fund. I have a US brokerage account, so I'll probably transfer some Euros over and stick them in ESG or similar (thanks caek and SaltySalticid).
I have been planning to prepay as much of the mortgage as I can without penalty (€10K per year), and will probably still try to do that while still growing our savings. The idea of reducing our total housing expenses to around €1000/month within 10 years (by paying M-I-L back and getting our monthly mortgage payment down to around €500 in that time) is very appealing to my wife and me.
One additional detail about our situation: I have a good job and am paid significantly more than the average in Austria for someone with my experience and position. The job is going great, but there are no guarantees, and there is a high risk that I would have to take a lower salary if I ever lost this job.
Of course, I'm open to more advice. I'll just say, as someone who has experienced the US financial mindset and the more conservative Austrian one, it's a great feeling to pay cash for everything and live well within one's means. This mortgage will be the first debt my wife has ever taken on, it will be the first one I've taken on in 20 years, and I believe we both sleep better at night not having to worry about whether we'll be able to cover all of next month's bills.
posted by Strumpf Marionette at 1:29 AM on April 28, 2021
I'm currently leaning toward keeping (but not increasing) the €140K down payment and accepting M-I-L's offer of the no-interest loan (this was purely a voluntary offer on her part - we did not ask her for assistance). The cash she intends to loan us is literally cash that she keeps at her home, so she's not even earning the fraction of a percent interest rate she'd get in an insured savings account right now. I'm not kidding when I say this family is extremely (sometimes probably to their detriment) averse to financial risk. She's not wealthy. She just has a good job, lives frugally, and distrusts the banks / financial system. Some of that is probably related to hearing stories about wartime privation from her mother, who is old enough to remember the hardships of WWII.
With the leftover €70K, we'll probably increase our furniture and fixture budget, and I'll see about sticking some of what remains in an index fund. I have a US brokerage account, so I'll probably transfer some Euros over and stick them in ESG or similar (thanks caek and SaltySalticid).
I have been planning to prepay as much of the mortgage as I can without penalty (€10K per year), and will probably still try to do that while still growing our savings. The idea of reducing our total housing expenses to around €1000/month within 10 years (by paying M-I-L back and getting our monthly mortgage payment down to around €500 in that time) is very appealing to my wife and me.
One additional detail about our situation: I have a good job and am paid significantly more than the average in Austria for someone with my experience and position. The job is going great, but there are no guarantees, and there is a high risk that I would have to take a lower salary if I ever lost this job.
Of course, I'm open to more advice. I'll just say, as someone who has experienced the US financial mindset and the more conservative Austrian one, it's a great feeling to pay cash for everything and live well within one's means. This mortgage will be the first debt my wife has ever taken on, it will be the first one I've taken on in 20 years, and I believe we both sleep better at night not having to worry about whether we'll be able to cover all of next month's bills.
posted by Strumpf Marionette at 1:29 AM on April 28, 2021
So far everyone advocating paying as little deposit as possible, and investing the rest, is saying so based on their recent experience or on the wisdom that the markets always go up. This has been very good advice for the past decade or so (while the markets climb after the big crash) and/or over the very long term (over which the markets do indeed, so far, always do well).
But there is also the possibility - which is obvious but no one has yet mentioned - that the SPAC-fuelled, COVID-relief-funded, crypto-addled global economy could crash soon after you put your five or six figure sum into it and you then have to wait years, or decades, to get back to where you would have been.
It’s a small chance, sure, but I just wanted to sound a little caution given the certainty of everyone else. The decision should depend on your appetite for risk and the amount of time you’re prepared to invest the money for.
posted by fabius at 5:21 AM on April 28, 2021 [1 favorite]
But there is also the possibility - which is obvious but no one has yet mentioned - that the SPAC-fuelled, COVID-relief-funded, crypto-addled global economy could crash soon after you put your five or six figure sum into it and you then have to wait years, or decades, to get back to where you would have been.
It’s a small chance, sure, but I just wanted to sound a little caution given the certainty of everyone else. The decision should depend on your appetite for risk and the amount of time you’re prepared to invest the money for.
posted by fabius at 5:21 AM on April 28, 2021 [1 favorite]
But there is also the possibility - which is obvious but no one has yet mentioned - that the SPAC-fuelled, COVID-relief-funded, crypto-addled global economy could crash soon after you put your five or six figure sum into it and you then have to wait years, or decades, to get back to where you would have been.
I think the output of what you have discussed is more likely high inflation than some kind of crash. In which case putting extra money in the mortgage would be even worse.
Keep in mind, paying the mortgage has no impact on the value of the house. Because you own the house, it's really better at looking at the loan as a separate bank account than as a "investment in real estate".
I still don't see any, psychological or otherwise, reason to try to keep monthly mortgage payment below a specific amount. If you invested 100k at 5% instead of at 1.5%, it would take less than a year for the benefits to basically pay you the difference down to $1000 a month anyway.
I'd definitely put the money somewhere protected from inflation. Gold, Toilet Paper (mentioned above), stocks, bitcoin, all would be protected from inflation, where as paying down your basically-0% loan is not.
posted by bbqturtle at 6:38 AM on April 28, 2021
I think the output of what you have discussed is more likely high inflation than some kind of crash. In which case putting extra money in the mortgage would be even worse.
Keep in mind, paying the mortgage has no impact on the value of the house. Because you own the house, it's really better at looking at the loan as a separate bank account than as a "investment in real estate".
I still don't see any, psychological or otherwise, reason to try to keep monthly mortgage payment below a specific amount. If you invested 100k at 5% instead of at 1.5%, it would take less than a year for the benefits to basically pay you the difference down to $1000 a month anyway.
I'd definitely put the money somewhere protected from inflation. Gold, Toilet Paper (mentioned above), stocks, bitcoin, all would be protected from inflation, where as paying down your basically-0% loan is not.
posted by bbqturtle at 6:38 AM on April 28, 2021
I just want to say, it sounds like you are clear on your financial priorities, and I think that's awesome. Especially when buying a house/condo because that can be such a high-pressure situation.
posted by lunasol at 1:56 PM on April 28, 2021 [1 favorite]
posted by lunasol at 1:56 PM on April 28, 2021 [1 favorite]
Response by poster: bbqturtle: If you invested 100k at 5% instead of at 1.5%, it would take less than a year for the benefits to basically pay you the difference down to $1000 a month anyway.
Can you help me understand the math? If you go back to my earlier post where I break down the initial monthly costs at the beginning of the mortgage, assuming the €140K down payment and €80K no-interest loan from M-I-L, they add up to €2K per month for the first 10 years.
If lower the down payment by €100K and put that money into something earning 5% per year:
1. I 'lose' €1500 per year to interest (1.5% * €100K).
2. I gain €3750 per year from my investment (€5K - 25% capital gains tax).
3. My net gain for the first year is €2250 (€3750 earned - €1500 'lost').
I can't see how earning a net of €2250 in one year will bring my monthly payments down by €1K.
posted by Strumpf Marionette at 12:01 AM on April 29, 2021
Can you help me understand the math? If you go back to my earlier post where I break down the initial monthly costs at the beginning of the mortgage, assuming the €140K down payment and €80K no-interest loan from M-I-L, they add up to €2K per month for the first 10 years.
If lower the down payment by €100K and put that money into something earning 5% per year:
1. I 'lose' €1500 per year to interest (1.5% * €100K).
2. I gain €3750 per year from my investment (€5K - 25% capital gains tax).
3. My net gain for the first year is €2250 (€3750 earned - €1500 'lost').
I can't see how earning a net of €2250 in one year will bring my monthly payments down by €1K.
posted by Strumpf Marionette at 12:01 AM on April 29, 2021
Response by poster: I got my math wrong up there, as well, because I forgot to factor in the increase in the monthly mortgage payment that comes along with reducing my down payment by €100K. Back of the napkin, reducing the down payment by €100K will cause the monthly mortgage payment to go up by around €400, for a total monthly housing cost of €2400.
posted by Strumpf Marionette at 12:57 AM on April 29, 2021
posted by Strumpf Marionette at 12:57 AM on April 29, 2021
There's a definite case of people speaking two languages in this thread.
Camp #1: optimize to maximize your net worth at some date in the future, subject to some assumptions about expected market performance. This optimization is easily expressed in 100% quantitative terms.
Camp #2: both monetary and emotional outcomes are important. Cannot be resolved in 100% quantitative terms. Very individual to the person making the decision.
I'd say OP is in camp #2 (so am I). Many people in Camp #1 don't even know that Camp #2 exists, and they are trying to answer a question as if another Camp #1 resident is asking it. Even if they know Camp #2 exists, the default response is often "why don't you become a Camp #1 person?".
My advice to OP: first decide if you even want to be a Camp #1 person. If so, there's a bounty of material out there on how to get there. It will take time, because changing your emotional response to dealing with money will not come easily. This will take longer than you have to make this decision!
posted by Jobst at 8:31 AM on April 29, 2021 [2 favorites]
Camp #1: optimize to maximize your net worth at some date in the future, subject to some assumptions about expected market performance. This optimization is easily expressed in 100% quantitative terms.
Camp #2: both monetary and emotional outcomes are important. Cannot be resolved in 100% quantitative terms. Very individual to the person making the decision.
I'd say OP is in camp #2 (so am I). Many people in Camp #1 don't even know that Camp #2 exists, and they are trying to answer a question as if another Camp #1 resident is asking it. Even if they know Camp #2 exists, the default response is often "why don't you become a Camp #1 person?".
My advice to OP: first decide if you even want to be a Camp #1 person. If so, there's a bounty of material out there on how to get there. It will take time, because changing your emotional response to dealing with money will not come easily. This will take longer than you have to make this decision!
posted by Jobst at 8:31 AM on April 29, 2021 [2 favorites]
Can you help me understand the math?
First, I use your numbers, then I do my own math below. I disagree about many details of how you are getting to your numbers, but I'll start with them!
Getting down to $1000 a month.
In a high down payment situation, your monthly loan cost is $1500 (you pay the fees either way). You begin to "invest" the $400 savings to $1900 (low down payment cost of mortgage) into your mortgage to lower the monthly payments. For that "investment" to bring you down to $1000 average for your total loan, it needs to earn $180,000 ($500 over 360 months). At 1.5%, $400 monthly takes 30 years to earn $180K.
In a low down payment situation, your loan cost is $1900. To get that number down to $1000, you need to make $900*360 = $324,000. The $100,000 at 5% does that in year 20, about twice as fast, or year 25, if you include capital gains tax.
You yourself have shown that you will earn $5k/year at 5% - first, that's a conservative number, the average is 10% each year. Second, you don't pay taxes on that until you take it out (are you maximizing your tax-advantaged options?). In Year 1, that's almost enough to cover the difference. ($400*12=4800) In year 2, when you have $105,000, it will be enough to cover more than the difference. You are right that you won't get to $1000 a month in year one, but in year one, it will cover the difference in cost (and then some) vs the higher rate mortgage.
You are deciding if you should invest this money into a 1.5% fund, or a '5%" fund. The 5% fund is always better, one, because it's a higher number, but two, because it's actually a 13% fund, and we are being pessimistic.
I went ahead and did the 30 year calculation below. The gains do get better over time for sure.
I have used the $ sign because I don't have other monetary symbols available. Since the loan of your MIL is basically free money, I've excluded it from the totals as well.
~~Normal, historically strong markets:
A: Low down payment
$350,000 starting
Down: 3% -$17,500
Mortgage amount: $332,500
$1462/month for 30 years -$526,320
-$202,500 invested into low-cost index funds, expecting a 10% net return
After 30 years, $3,533,503
Payments+Total Equity + Value of investments: -$746,320+$350,000+$3,533,503 = $2,787,533
---
B: High down payment
$350,000 starting
Down: -$230,000
Mortgage amount:
$120,000
$531/month mortgage for 30 years -$191,160
$0 invested into low cost index funds, but investing the additional $900/month for 30 years expecting a 10% net return (-$324,000 invested)
After 30 years, $1,871,363
Payments + Total Equity + Value of investments: -$745,160+$350,000+$1,871,363 = $1,476,203
~~Situation 2: Poor Stock Market Returns
A: Minimum Down Payment
Down: 3% -$17,500
$1462/month for 30 years -$526,320
$202,500 invested into low-cost index funds, expecting a 4% net return
After 30 years, $656,788.
Payments+Total Equity + Value of investments: -$746,320+$350,000+$656,788 = $260,468
B: Large Down Payment
$531/month for 30 years
$0 invested into low cost index funds, but investing the additional $900/month for 30 years expecting a 4% net return
After 30 years, $618,762
Payments + Total Equity + Value of investments: -$745,160+$350,000+$618,762 = $223,602
posted by bbqturtle at 10:28 AM on April 29, 2021 [1 favorite]
First, I use your numbers, then I do my own math below. I disagree about many details of how you are getting to your numbers, but I'll start with them!
Getting down to $1000 a month.
In a high down payment situation, your monthly loan cost is $1500 (you pay the fees either way). You begin to "invest" the $400 savings to $1900 (low down payment cost of mortgage) into your mortgage to lower the monthly payments. For that "investment" to bring you down to $1000 average for your total loan, it needs to earn $180,000 ($500 over 360 months). At 1.5%, $400 monthly takes 30 years to earn $180K.
In a low down payment situation, your loan cost is $1900. To get that number down to $1000, you need to make $900*360 = $324,000. The $100,000 at 5% does that in year 20, about twice as fast, or year 25, if you include capital gains tax.
You yourself have shown that you will earn $5k/year at 5% - first, that's a conservative number, the average is 10% each year. Second, you don't pay taxes on that until you take it out (are you maximizing your tax-advantaged options?). In Year 1, that's almost enough to cover the difference. ($400*12=4800) In year 2, when you have $105,000, it will be enough to cover more than the difference. You are right that you won't get to $1000 a month in year one, but in year one, it will cover the difference in cost (and then some) vs the higher rate mortgage.
You are deciding if you should invest this money into a 1.5% fund, or a '5%" fund. The 5% fund is always better, one, because it's a higher number, but two, because it's actually a 13% fund, and we are being pessimistic.
I went ahead and did the 30 year calculation below. The gains do get better over time for sure.
I have used the $ sign because I don't have other monetary symbols available. Since the loan of your MIL is basically free money, I've excluded it from the totals as well.
~~Normal, historically strong markets:
A: Low down payment
$350,000 starting
Down: 3% -$17,500
Mortgage amount: $332,500
$1462/month for 30 years -$526,320
-$202,500 invested into low-cost index funds, expecting a 10% net return
After 30 years, $3,533,503
Payments+Total Equity + Value of investments: -$746,320+$350,000+$3,533,503 = $2,787,533
---
B: High down payment
$350,000 starting
Down: -$230,000
Mortgage amount:
$120,000
$531/month mortgage for 30 years -$191,160
$0 invested into low cost index funds, but investing the additional $900/month for 30 years expecting a 10% net return (-$324,000 invested)
After 30 years, $1,871,363
Payments + Total Equity + Value of investments: -$745,160+$350,000+$1,871,363 = $1,476,203
~~Situation 2: Poor Stock Market Returns
A: Minimum Down Payment
Down: 3% -$17,500
$1462/month for 30 years -$526,320
$202,500 invested into low-cost index funds, expecting a 4% net return
After 30 years, $656,788.
Payments+Total Equity + Value of investments: -$746,320+$350,000+$656,788 = $260,468
B: Large Down Payment
$531/month for 30 years
$0 invested into low cost index funds, but investing the additional $900/month for 30 years expecting a 4% net return
After 30 years, $618,762
Payments + Total Equity + Value of investments: -$745,160+$350,000+$618,762 = $223,602
posted by bbqturtle at 10:28 AM on April 29, 2021 [1 favorite]
Personally, I would not borrow the money off your MIL. At least not so that you can have a larger down payment and/or spend more money on furniture.
Money can make people weird. Maybe she's not the judgey type, but if I lent someone a lot of money, I would then judge how they spent it.
posted by kjs4 at 5:19 PM on April 29, 2021 [2 favorites]
Money can make people weird. Maybe she's not the judgey type, but if I lent someone a lot of money, I would then judge how they spent it.
posted by kjs4 at 5:19 PM on April 29, 2021 [2 favorites]
This thread is closed to new comments.
posted by Pater Aletheias at 11:54 AM on April 27, 2021 [6 favorites]