University Mortgage options

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stochastic
Posts: 28
Joined: Sun Sep 06, 2015 5:09 pm

University Mortgage options

Post by stochastic » Thu Oct 12, 2017 10:10 pm

We just had our offer on a house accepted! The purchase price is a bit over 900k. Property taxes will be an uncomfortably large 18k. It is a short walk to work at the university on a nice street, similar places come up only infrequently so we are happy with it. The university where I work (and have tenure) has three very generous housing programs to help faculty purchase properties and I wanted to get boglehead advice on which combination to take.

Programs:

Low Interest loan: About 2.6% fixed for 40 years. Maximum 800k

Forgiveable Loan: 220k, zero interest, forgiven 10% per year over 10 years (which counts as taxable income)

Tenants in Common Program (TIC): The university will buy up to 33% of the house for us. When we sell it they get their share of the sale price. We would pay all the property taxes, insurance and maintenance. For a major renovation of over 50k they would adjust the percentage of ownership to reflect the renovations by appraising the house before and after. Colleagues have said the increase in the appraisal often doesn't reflect the money that you spend on it but there is a floor where the university will credit you with at least 50% of what you spend and at most 100%.


The main question is whether to use the Tenants in Common program

Option (a): Loan 380k, forgivable loan 220k, 300k TIC: The TIC program is essentially free rent for a third of the house (although you do pay tax on some of the imputed rent - there's some formula that takes into account the fact that you pay the property tax, insurance and maintenance). But we plan to renovate the place, maybe 100-120k initially and then more in 5-10 years. We feel like we may not really get back the full value of that investment in the calculations.

Option (b): The alternative would be Loan 680k, forgivable 220k. Our mortgage payments would be an extra $1000 a month that way but we wouldn't have to deal with the university when renovating and would not have the issue of not getting the full amount back.

Option (c): A final alternative is that with the forgivable loan we can actually take out equity (or I guess have negative equity) so that would be Loan 800k, Forgivable 220k and we would get 120k to add to our investments. It's tempting to borrow as much as possible at 2.5% when getting 4% on Tiaa traditional.

In the other direction we have funds where we could put more down more and take a smaller loan.


Background
Ages: 35, spouse 39, no children
Income: me 285k (possibly more depending on summer salary), spouse 60k
Annual retirement contributions: 403 x2, 457, employer contributions, Roth IRA x2: 102k

Cash: 200k
Taxable: 500k
Retirement Accounts: 300k
Previous house: rented for the next year after which we will sell it. The equity after transaction costs is about 700k equity

ps In a previous thread I asked about options for the forgivable loan, saying that we didn't plan to ever move out of our rented place. One piece of advice we got several times was to remember that our circumstances could change. This turned out to be good advice! The university announced our place would be torn down in a few years so we started looking for places to buy.

Rob Bertram
Posts: 796
Joined: Mon May 05, 2014 12:15 pm

Re: University Mortgage options

Post by Rob Bertram » Fri Oct 13, 2017 12:37 pm

Tenants in Common (TIC) sounds like a huge headache and possibly a bad deal for you if the house appreciates.

If you are looking to leverage more, borrowing more against your house might be an expensive way to go. With $500k in taxable, I would suggest looking at margin rates or (even better) implied financing rates on futures which are probably around 1.4%.

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