Nashiitashii and I are beginning the process of saving up for a mortgage. I found that we can get very good rates through our credit union, but we’d like to save money towards the down in the most efficient manner possible. I’ve looked about a bit at the various “products”, (og, I hate that word now) and it all seems pretty much the same to me. A thought occurred to me to maybe borrow a few thousand from my parents, deposit it somewhere in addition to our funds and use this larger amount to gain more return over the next year instead of slowly saving up whatever we decide to put away. We could pay them back at a monthly rate while having a larger initial amount to keep in the account/portfolio/whatever.
So where should we look to maximize our investments? We have about 5k to use.
Obligatory tangent stomping: We have a retirement account, no other outstanding debt other than a student loan and a small, easily paid balance on our credit card. (we don’t overextend)
You are planning to take out the loan in a year’s time, is that correct? So your goal is to get maximum return on the savings/investment over a one-year term?
I agree with your idea of borrowing everything you can from parents to get where you want to be as soon as possible. People who have that resource available should use it - it will just help you get ahead of the game quicker (as I can tell you have already surmised). One question - when would your repayments to your parents start? Hopefully after you take out the loan, right? So that would be about one year after you borrow the money. Do they expect interest back? If so how much? Make sure the loan repayment plan is clear, written down and affordable (it’s foolish to risk bad blood later on a hand-shake agreement, because humans have frail memories, regardless of their intentions and even though they are your parents).
Unfortunately I don’t know what ‘products’ are available in your area, so I won’t be much use for the specifics. All I can say is, if the investment period that you are contemplating is one year, then you are probably best off taking something like a 1-year fixed term deposit at a bank. You won’t make much interest on it though. The alternative is to risk it on some kind of investment, but is that what you really want to do? And whose advice are you going to trust on this MB?
Is the parental loan to be used for the down payment or just to allow you to invest a larger amount now? If the latter, then don’t bother with the parental loan. If you’re buying a house in a year or so, any money you’re saving should be someplace safe, like a bank account, and a few thousand will not make much difference to the interest rate you earn.
To invest a larger amount now. We theoretically could put about 5k away at the moment though it would eat up all our savings, and then save some more over the coming year. Grabbing a loan from Mum and dad and start paying it immediately would allow us to keep some savings liquid and have a far larger immediate amount to begin earning interest or returns/ dividends… The thought is that by having a greater amount in a stable account for a year, we could also show another arm of stability to the bank and get away with a smaller down. Since the homes we are looking at are less than 100k I don’t want to, (and shouldn’t have to according to our credit union) have to pony up any more than 8k TOTAL for this venture.
But the investment would go towards the down-payment, wouldn’t it?
So, by borrowing it now, you’re supposed to be able to get some % (not much, but some) on it so the “loan towards the down payment” is actually a little bit bigger than if you got it Just In Time.
When I bought my car in '00, I asked Littlebro, whose job involved going to banks daily and through all the banks in town in a week, to check out car loans for me. He made me a loan instead, saying “the best loan you’ll get is 7%; the best return I’d get, given how conservative I am with investing, is a 4% and that’s aiming high. By making you the loan, the family unit is making a 3% - whoopee!”
I think you need to go into detail re. the %s involved, before deciding when to get the parental loan and so forth. I’ve seen short-term investments (1y or less) which, once you took all fees into account, returned less than the principal (well, officially they did return the principal plus interest, but the fees were more than the interest, so the total result was a loss).
You got it. The idea would be to put away a much larger amount NOW, earn interest, or returns on it and only add what we could comfortably afford to save into the account. Monthly, we would pay back the parents as if we were putting that money into the account. This way there is a large bundle up front earning returns rather than us having to shove every spare cent into the down payment savings account over time to get to the same goal. Anything spare we could afford to contribute just adds to that amount. Mum and Dad probably would not charge us interest on the loan provided we paid our payments in a timely manner.
You are misunderstanding my intent. We would be borrowing up front cash from them to place into a savings account and hold it there. This way I could deposit double the amount, and the interest earned, up front rather than building it up month to month.
All that is beside the point. Let us assume I have 5k to invest somewhere and I would like to maximize my return in one year. What are the best options in your opinion?
Since I’m invisible in this thread, I cannot be held responsible for recommending that people who want to make a maximum profit in one year (unlike all those other people who don’t want to make a maximum profit in one year) put all their money in gold. Or robots. Or FX trading. You didn’t hear it from me.
As Darth noted, short-term rates are very low, especially once taxes are deducted. 3% on $5 k isn’t really all that much to worry about optimizing for maximum return. And anything that promises more incurs additional risk.
Put it in a savings account or short term CD, the best you can find, but at the end of the day the difference in return and in dollars is going to be negligible. I suppose you could try to find a bond from a large stable company for a higher return, but again, since the relative risk is small, so will be the return.
The notion of borrowing from your parents just to stuff it in a savings account is really no different than them keeping it in their own investments and cutting you a larger gift check/loan when you need it. Either way’s fine, but it’s probably easier for your parents to just cut you a check.
Or… if you don’t care about risk, drop it in a 3x levered foreign ETF or head to a casino. You might end up with a nicer house.
In short: The return potential is small no matter how you look at it ($150). The only thing you should care about is security.
As for the investment, I agree with everyone else that safety is the most important consideration. Over one year, at today’s interest rates, you are unlikely to make a lot on it. A $5K investment at 2% APR is $100. Not exactly make or break, and the delta is not going to be very big.
As for your parents. If it is a loan, you need to have a loan document, since banks don’t like to see money mysteriously appearing in your account when you are qualifying. We’ve had a loan with my father-in-law for over 20 years now, and since it is documented there has never been any trouble. If it is a gift then it is probably better to do it now rather than closer to the time. There are gift limits, but it sounds like you are well under them.
Also, consider that if your parents have a reasonable amount of money they might be able to promise you a loan of a larger amount in a year, since they can probably risk investing the money in a better yielding investment than what you can afford, and keep risk moderate.
As others have told you, “safe” investments such as CDs pay a remarkably low interest rate these days. Personally, I’m only comfortable “gambling” 10% of my total portfolio on high return/high risk investments, which in your case would only be $500. You’d be hard pressed to make enough to overcome the commissions on a $500 investment.
I’d divulge my plans to my parents and see if they offered to gift the amount needed for a 20% downpayment. It would be a shame to let these historically low interest rates pass you by.
That’s basically our position as well. Besides the interest rates, the prices are radically lower than in the past. the home we rent was bought for 140k and was recently appraised for 89k. It’d be idiotic to wait until things get better, so we are beginning to work on things now.
As to a 20% “gift”, that’s not going to happen. I’ve no doubt that they could be talked into a >10 k “gift” that we repay on the downlow, but that sort of money isn’t going to happen. Mum is terrified of not having enough money in her retirement even though they are quite affluent by all measures.
No, and I wouldn’t ask them to. We believe it’s bad to do business with family like that. Under the table stuff is fine as it’s all between family, but once you start bringing legal documents into it, things can get messy.
Honestly, Acid Lamp, there’s no free money out there today like there used to be. For your entire investment, we’re looking at a couple hundred bucks, give or take. That’s the price of a few date nights. The best investment you can make right now is to borrow from relatives (for the downpayment, not to invest), sell a car, pack your lunch, stop going to Starbucks, cancel HBO and the NFL Ticket subscription, get rid of the internet on your smartphone, change your own oil, etc. If you shave just $200 off of your annual (annual!) budget, you can beat all the investments out there right now.