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Learning, Sharing, and Teaching => Real Estate and Landlording => Topic started by: sleeplessinchicago on May 22, 2016, 10:07:17 PM

Title: total newbie looking for friendly advice
Post by: sleeplessinchicago on May 22, 2016, 10:07:17 PM
So after years of trolling I finally registered for this site. I am desperately seeking help with buying a second property. This is not (sadly) an investment property, but we are buying it for family members to live in (who are currently in a terrible living situation). They will be paying us a small rent but not enough to cover mortgage and taxes. But that's ok. If helping our family delays our retirement by a few years, we're ok with that. Karma, etc. Anyway. I don't know the best way to pay for the house. Budget is around $200k.
Option 1: Take all of our cash + borrow from our 401k to make the biggest downpayment possible, making the mortgage itself as low as possible (around the $100k mark). Pros: interest paid on the 401k loan go back to us, not to the bank. Con: that money won't be growing for the next few years
Option 2: Make the requisite 20% downpayment and take a $160k mortgage, paying it over 15 years (we think we want to do a 15-year), letting our 401k and other investments grow. Rates I got quoted were around 3.6 percent for a 15-year fixed. This seems like a lot of money ultimately going to our bank, which doesn't sit well with me.
Option 3: Make a 20% downpayment and take a 5-year ARM while rates are good, paying off the house before the 5 years is up (this is doable). Cons: our own house mortgage rate will be higher than the new house, because we bought a few years ago. So it would make more sense (maybe?) to pay the higher-interest loan off first?
I can't figure out if saving the interest money from taking a smaller mortgage offsets the money that we would lose from not letting the 401k grow. For what it's worth, if we are aggressive about it, we can probably pay off the house in 2-3 years. Maybe 4-5 if we have another kid next year (daycare + college savings = $3500/month for one kid now).

We have no desire to invest in real estate (at least at this point), which is why I know nothing about it, and trying to educate myself on the best way to go about this is making my head spin. So thanks in advance!!

p.s. You people in this forum are the reason I was able to pay off $215,000 in college/medical school debt in under two years, including 5 months of (unpaid, cause I'm American) maternity leave. So thanks!! I just chuckle when coworkers grumble about their insurmountable educational debt. Mwahahaha.
Title: Re: total newbie looking for friendly advice
Post by: aFrugalFather on May 22, 2016, 10:23:18 PM
This reads like the age old question of whether to pay off mortgage or invest. 

Right now loans are (relatively) cheap.  If it were me I'd do 30 year fixed and invest the money saved, but after skimming the post I don't think you mention exactly what you would do with it?  You say perhaps into 401K?  What type of investments in the 401k?  Would you be able to max it out?  Everyone is different though, and it sounds like you are loan averse. 
Title: Re: total newbie looking for friendly advice
Post by: sleeplessinchicago on May 22, 2016, 10:33:19 PM
Yeah, you are right, I don't know why I didn't even see my own question in that light. For whatever reason I am totally loan-averse, but at the same time we happily took out a 30-year mortgage on our current house. I think part of the reason we want to wipe out debt is that we stick to financial goals better when there's a giant debt in our faces (like my student loans). Once my loans got paid off, we both slipped from MMM-like frugality to more standard American spending ways. So maybe trying to pay off debts is a good way to keep us on financial track. I dunno. But financially I do sort of see why a 30-year makes sense, even though after 30 years we will have paid nearly $100,000 to the bank in interest. I just can't wrap my brain around this making financial sense.
Title: Re: total newbie looking for friendly advice
Post by: aFrugalFather on May 23, 2016, 02:55:29 AM
$200,000 left to grow at a reasonable 6% rate would be $1,148,698 after 30 years. 
Title: Re: total newbie looking for friendly advice
Post by: Rubic on May 23, 2016, 02:51:39 PM
Is it necessary for you to purchase a property to assist your distressed family members?  Is it not possible to rent a place to improve their current living conditions?