Author Topic: Invest down payment while living in house  (Read 4199 times)

mst3k4L

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Invest down payment while living in house
« on: January 09, 2013, 06:27:29 PM »
I searched the forum and couldn't find a similar question, so apologizes if this has been asked recently.

The wife and I are moving from TX to CA this summer and plan on buying a house.  A house has not been picked out yet, but it is safe to assume that a 20% down payment will be between $40,000 - $50,000.  We currently have this money in savings, and enough additional money to cover the closing costs of the house.  We also have no dept (credit cards, house, car, student, etc.).

I was originally thinking to just pay the 20% down payment in cash, but with interest rates so low, I was looking for other options.  Is it possible to take out a second 30-year loan for the 20% down payment, invest the $50,000 we have, and then use the income from the investment to pay the monthly rate of the second loan?  What type of investments would work for this idea?  Is there a better option than anything else mentioned?

Thanks in advance

destron

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Re: Invest down payment while living in house
« Reply #1 on: January 10, 2013, 09:47:14 AM »
This question gets asked all the time in a different way -- can I take money out of my house and invest it / take out a low interest loan and invest it / etc...

The short answer is probably not, and if you did it would be incredibly risky (for those two questions).

For your scenario, I would say no. First, where are you going to get a second loan for the down payment that will be less than just getting a huge mortgage with 3% down? More likely you would just put down 3% and have a rate around 4-4.5%.

Now, you have to beat 4.5% and inflation with your investments. That is risky. Plus, you then have to pay mortgage insurance (PMI) since you don't have 20% equity in your house -- that will be another $200 / month, or $2400 year on top that you have to beat. So, unless you have some incredibly high return and low risk investment in mind (please share!) it will not work out for you.

I recommend you just go the standard, MMM conservative route and put down 20%.

mst3k4L

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Re: Invest down payment while living in house
« Reply #2 on: January 10, 2013, 02:28:52 PM »
Thanks for the response.

I'm confused by something.  Beating 4.5% and inflation with investments over a 30 year time seems fairly doable, so I don't see how that is risky.  Perhaps piggy-back loans aren't for 30 years?  I had assumed that this second piggy-backed loan would also be paid off in 30 years along with the mortgage, but if that is wrong let me know.  I've never bought a house before, and am very new at this.

Jack

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Re: Invest down payment while living in house
« Reply #3 on: January 10, 2013, 02:46:24 PM »
An FHA mortgage (which allows you to finance up to 96.5%) will have a higher interest rate than a conventional loan, plus annoying PMI.

The 80/20 loans where you have a conventional mortgage without PMI plus a second mortgage at a higher interest rate haven't been obtainable since the crash, as far as I can tell.

mst3k4L

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Re: Invest down payment while living in house
« Reply #4 on: January 10, 2013, 02:52:09 PM »
I've heard that the piggy-back loans are harder to get after the crash, but it is still possible if you have good credit.  I have a credit rating of 740+, so I should be able to get one somewhere.

destron

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Re: Invest down payment while living in house
« Reply #5 on: January 10, 2013, 04:03:40 PM »
Thanks for the response.

I'm confused by something.  Beating 4.5% and inflation with investments over a 30 year time seems fairly doable, so I don't see how that is risky.  Perhaps piggy-back loans aren't for 30 years?  I had assumed that this second piggy-backed loan would also be paid off in 30 years along with the mortgage, but if that is wrong let me know.  I've never bought a house before, and am very new at this.

The 20% loan will be a higher rate than the 80% loan (if you can get it), and inflation is 2.5-3.5%, so you will need to do better than whatever your 20% loan rate plus inflation.

This is also antithetical to the MMM philosophy of paying off the place you live in and only purchasing things that you can afford.

Also, you will be susceptible to fluctuations in housing prices. You will not be able to refinance the property since you have no equity, and you will not be able to sell it without putting in additional capital.

Personally, I think it is a moot point because I don't think you will be able to get the 80/20 loan. It is my opinion that doing an 80/20 or getting a 3% FHA loan with PMI is a bad idea.

tooqk4u22

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Re: Invest down payment while living in house
« Reply #6 on: January 10, 2013, 04:09:08 PM »
I've heard that the piggy-back loans are harder to get after the crash, but it is still possible if you have good credit.  I have a credit rating of 740+, so I should be able to get one somewhere.

You need to separate the incremental cost of capital when doing this to really understand the return - it is not as simple as saying my rate is 4.5% vs. 3.75%.  When you break out the amount of the loan above 80% LTV and factor in all the addtional costs (higher rate, mortage insurance, etc.) and on that amount you will see that imputed rate is much higher. 

Assume a $200,000 purchase and 30 year mortgage:

Conventional:
20% down/$40k
3.75% rate, no points.   

FHA
3.5% Down/$7k
Interest Rate - 3.75%, no points
Upfront Mortgage Insurance - 1.75%/$3,378
Monthy Mortgage Insurance - 0.6%. per year (0.05% per month) or $1,158/year

The difference in the down payments is $33k.  Lets assume that the Upfront is spread over 10 years or $338/year.  That plus the $1,158 ongoing = $1,496/33000 = 4.5% + 3.75% rate = 8.25% effective rate. 

Now there may be some other assumptions to make and it depends on how long it would take to get to 80% LTV but basically you need to get a 8.25% return on your investments just to breakeven with the higher loan amount, and if you search the forum you will see that many time this number approachs 9-11%.

Not worth it.  If your question was between a 50% loan and an 80% loan it would be a different story and the higher loan would win mathmatically all day long at these low rates (but not necessarily emotionally).





mst3k4L

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Re: Invest down payment while living in house
« Reply #7 on: January 10, 2013, 04:32:48 PM »
Thanks again for the responses.  I guess I'll just do the traditional 20% down payment.  It's a shame I can't do something else with the money.

DoubleDown

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Re: Invest down payment while living in house
« Reply #8 on: January 11, 2013, 10:14:16 AM »
FWIW, I don't think it's a shame you'll be putting the money saved into a 20% down payment. Having a decent amount of equity in your home is a great way to build your net worth. And once you've purchased the home, you can always look into taking out a HELOC to get access to some of that equity (being able to borrow up to another 10% of the equity shouldn't be a stretch). Now, some might reasonably question the wisdom of using money borrowed from a HELOC, even at a low rate, to invest elsewhere, but it's your money.