Borrowing from Family: a semi-hypothetical

Morning y’all. Today’s dilemma: not really whether to borrow from family, but how much to borrow.

It’s a hypothetical because it would only happen if some up in the air job stuff happens and I have a good reason to buy a house approximately a year from now. I am definitely going to have a job after this contract ends, which is the good news; the question is where will this job be located, and a house may or may not be plausible depending. But let’s assume for the sake of argument that I am in fact going to be in a small city where I could buy a very nice house in the $90-110,000 range. It could be a bit less, but again, let’s go with the middle figure there, and assume I want a $20K down payment.

My current saving schedule would have me at only about $3000 in the down payment fund (as opposed to my various other savings funds for repairs, emergencies, travel, etc) by then. Uh….

So, options:

1) Raid the emergency etc funds. Not only do I think this is a bad idea in and of itself, but it also would probably only get me up into the $10000 range, which still isn’t $20K.

2) Borrow $17K from my parents. Given the salary I’d be at, I could plausibly pay this off, while paying minimums on the mortgage itself, within a couple of years at the most, possibly faster if I had a renter share the house. I could very easily get it back to them before they’d need it themselves for the later part of their retirement. (We have a very good relationship, their own mortgage is paid off, and while I definitely would not take $17K from them as a gift, they could probably afford to do that, even. But I’d rather they have it back and spend it on themselves, at some point if not now.)

3) Stop contributing to retirement (which, to recap, I do at the rate of $1000 a month) either immediately, or beginning later in the fall, and bank that money instead. Depending on when I started and when I actually bought the house, I could have my own down payment savings account at about $13-15K, meaning that I’d only borrow about $5-7K from my parents, which I could repay in say six months in addition to the mortgage itself.

I’m leaning towards Option 3. I could stop contributing in September — by then my retirement accounts should be over $20K. I’d have about 7 or 8 months to save all the cash I possibly could, and if I did end up not buying after all, I would put that cash (1) an IRA til I maxed out and (2) a taxable investment account. And of course I’d restart my contributions as soon as I either bought, or decided not to buy.

However, maybe I’m wrong about this. I’m old, after all, and maybe house or no house, it’s just not a good idea to stop retirement contributions for any reason right now when I’ve only even had an account for a year. I’m really seeking thoughts on these scenarios — what am I not thinking about?

 

26 thoughts on “Borrowing from Family: a semi-hypothetical

  1. Kirsten says:

    I’m voting for just borrow it from your parents.

    And I don’t take that lightly. Hubs takes a lot of money from his parents (as gifts) and it makes me super uncomfortable. If rather us stand on our own two feet. That said, you might be able to find a very nice house for less than what you listed. If you took on a renter, you are going to be in good financial shape. The parental option does no damage to your financial standing and allows you to actually increase your standing (by owning property, having an asset). The others do at least temporary damage. You’ll want the emergency fund even MORE when you have a home and all the possible repairs. You need to be saving for retirement like crazy. Since your parents can easily do this – go that route.

    1. thesingledollar says:

      Oh, I definitely won’t touch the EF 🙂 It’s nice to hear someone saying just go for it, regarding my parents — I might end up doing a mix of options B and C if I do end up buying.

  2. Cindy says:

    Being equally as old (okay, slightly older) I’m in the “it depends on how you see your future” camp. Retirement contributions are super important. But, housing is a big portion of retirement consideration. Many people see paying off a house as one portion of their retirement savings plan. And, while 20% down isn’t “paying off” a house, it’s still a good chunk in that direction. I’m all for spreadsheets, so I’d probably run some scenarios on how much $ I need in retirement, and what rates of savings I’d need to get there, and work from there.

    That being said, there are no guarantees. But, with 20% in off the bat, you have some flexibility if you ever need to sell and change courses.

    1. Cindy says:

      Also, it sounds like things are going in a good direction job wise. That’s awesome!

    2. thesingledollar says:

      Spreadsheets! I might need some help with those. But they’d probably help 🙂

  3. Hannah says:

    5% down + PMI isn’t actually horrible, and you could aggressively pay down the mortgage once you actually bought the house.

    My vote would be don’t stop contributions until you are at least 75% sure you are going to buy. Then stop, sock away money like crazy, and build as big of a down payment as possible while still covering closing costs. If that puts you at less than 20% it’s fine. You’ll still get a good rate.

    I know your parents are probably cool, but I don’t think there’s any reason to create a potentially emotional situation out of a house.

    1. thesingledollar says:

      I like the “wait til you’re 75% sure” idea — I’m definitely not there yet, more in the 40-50% range. Not a time to make rash decisions for sure.

  4. I’m kind of leaning towards what Hannah said…that said, I feel like I’m so not knowledgeable about how a house could be beneficial as an investment, since I’ve been renting my whole life. But I guess I’m always of the belief that if you can do it on your own, then do it. It will feel like a great sense of accomplishment. Just my not-knowledgable two cents. 🙂

    1. thesingledollar says:

      Mmm, no, good points. I’m not sure I’d see it as an investment really — a bit more in tomorrow’s post.

  5. I’d say remember that there are a lot of fees related to buying a house. Closing costs, inspections, etc. I’d have at least an extra 5k aside to help pay for that stuff on top of down payment.

    1. thesingledollar says:

      Yeah, good point. I think in my current city sellers usually pay some of those expenses but I’ll have to look into that for sure.

  6. There’s nothing magical about buying a house, and so I’d vote to keep renting. Definitely don’t stop contributing to your retirement — you’ll never get that time back. As for buying, if you buy with a 30 year mortgage, you don’t really build much equity until you’re 10 years in. Far better to save a bit longer and wait until you can buy with a 15 year mortgage, where you start building equity basically immediately. People are in such a rush to buy, that they often don’t consider the amortization schedules on mortgages and see that you aren’t actually “paying yourself” with those mortgage payments — you’re actually just paying the bank, for a really long time. Given that, I’d rather just rent in most cases.

    If you feel like you have a strong relationship with your parents, then borrowing from them is worth considering. We did that to pay off credit cards a while back, and paid the parents back at a good rate of return. It worked out well on both sides, and didn’t create any drama. But don’t stop funding that retirement! 🙂

    1. thesingledollar says:

      All good points. I’d much rather get a 15 year mortgage, definitely, if I do buy — and it’s very much an “if” still….

  7. If you move, how long will you be there? If your job is going to make you bounce around, I’m of the mindset that buying isn’t a good idea.
    If you do decide to buy, I say
    1) Hell no to raiding your emergency fund. Once you buy a house, you’ll need an emergency fund even more. LEAVE IT ALONE.
    2) Money and family sucks. Don’t unless you have to. If you have to, let this be a stopgap. e.g $3-5k for closing costs. Then pay them back immediately.
    3) I don’t like slowing down retirement contributions. If you are going to, I’d do what Hannah recommends

    1. thesingledollar says:

      All good points! I’m writing more on my thoughts in tomorrow’s posts and that answers some of these.

  8. Jason says:

    I personally don’t like any of the options. How about saving up for a house down payment that is not necessarily 20%. I totally understand that you want to avoid PMI, but you can get a house, which you describe (and if you have fairly good credit) for 3.5% to 5% down. Depending on where you live there are also programs that help people, depending on income, get into a house with the equivalent of 100% down payment. Most cities and states have first time home-buying programs. Your new job (congrats btw…is it t/t?) might also have some local amenities. We bought a house for less than that and I was able to put it on a 15 year fixed-rate mortgage, but I researched it a lot and we could’ve used several programs to help us out.

    So I would go with option 4 exploring some more options. I don’t think you need to do any of the three and you could save enough (fairly quickly based upon your savings) for a house downpayment within a year or so.

    1. thesingledollar says:

      I think exploring more options is a good idea 😉 More on the job in tomorrow’s post.

  9. I’d say if you’re moving to a new small town, maybe you should rent for the first year at least. It would let you know if you actually like the job and town before you put down your roots. It would also let you save up for your downpayment more.

    1. thesingledollar says:

      Yeah, good point — if I move I’m *way* more likely to rent rather than buy.

  10. My thoughts are similar to those expressed by others:

    (1) Don’t touch your emergency fund! Home ownership comes with countless surprise expenses! We were SHOCKED by what we spent on propane during our first winter in our house!
    (2) I have no idea how old you are, but suspending retirement savings to buy a house doesn’t feel like a good trade-off.
    (3) It’s hard to say about borrowing from your family. If you feel confident that your parents can afford it and it wouldn’t damage your relationship with them in any way, it may be right for you.

    Good luck! I look forward to hearing what you end up deciding!

    1. thesingledollar says:

      Thanks for the thoughts! Answering these points at length in tomorrow’s post.

  11. Crystal says:

    If you have to borrow money from your parents, you can’t afford a house. Also, unless you’re going to stay put in the house at least five years (10 is much better), you’re better off renting. Frankly, I think it wold be very unwisely to raid your EF. No job is guaranteed and what happens if you lose your job or have a big medical expense? Since you’re older, I would not stop saving for retirement. In fact, I would put as much money as you can away for it. I’m almost 35 and while I have some retirement savings, I feel like I’m so far behind what I should have. Money that I should have been saving for retirement went to pay over $50k for a masters degree that is pretty much useless for me. I dug myself out of that hole last year and am debt-free.

    1. Crystal says:

      *unwisely should be unwise

    2. thesingledollar says:

      First of all, congrats for the debt-freeness 🙂 Second, I wasn’t serious about the EF raid! And third, I hear you on the can’t afford it, but there are special circumstances — more on that in tomorrow’s post. Thanks for the comment!

  12. I’m not as close the the possibility of buying a house, but I have a feeling I’ll have similar considerations. Having worked with many people upside down in their houses during the financial crisis, I’m scared to pull the trigger on buying a house too soon.

    1. thesingledollar says:

      I know, I definitely don’t want a house with a small down payment — I want some equity right from the start, just in case. It is scary. So many things can go wrong!

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