How to determine down payment vs loan amount?

[bhuether]

Hi,

I have a ROTH IRA account that is valued around $270,000, with cost basis amount  $140,000. As I understand, I can withdraw from my Roth IRA, penalty free (I am in mid 40's), if I don't withdraw more than the cost basis (contribution).

My wife and I are planning to buy a home in Moscow, Russia, and I am trying to figure out, what amount of this Roth IRA cost basis I should use, versus taking out a loan.  In Moscow, if we put down 30% or more of the home value, we can expect a mortgage rate around 5-6%, and we would aim for 10 year loan.  We are looking to purchase a home for around that $140,00 ballpark.  In Moscow, there are options similar to a mortgage, but smaller timeframe and no interest. For instance 5 years. Not sure how that is even profitable, but it is an option (maybe that option is only direct with a seller in which case a jacked up price is what they are doing to make a 0 interest loan sensible...).

I just have no idea, should I use as much of my own cash as possible and minimize the loan amount, or given a certain loan rate and period, is there some benefit to taking out some loan of some percentage of the home value?

What would you do? Is there some mortgage interest rate under which it is advisable to take a loan and let one's money sit to continue earning?

[Opus 17]

We have to do a lot of oversimplification just to come up with a rule of thumb.  If we assume all the following to be true:

1. the house will not be your primary residence so you can't take a tax deduction for the mortgage interest
2. won't be used as a rental 
3. inflation will be the same in the US as Russia
4. ignore currency exchange rate fluctuations
5. if you invested more in the home and had lower mortgage payments, you would re-invest the difference back in the IRA or another productive investment

then any amount put toward the house in excess of the minimum down payment gives you a return on investment equal to the interest rate (5-6%).  Do you think you will get a larger return in your IRA?  It depends on the economy and your level of risk tolerance (aggressive vs conservative.)

Changing the assumptions affects the result.  If you use the home as a rental, you can deduct the mortgage interest as a rental expense, so that leans toward a larger mortgage.  If you expect inflation to be higher in Russia, that makes future money cheaper (a $1000 mortgage payment 10 years from now is less real money than $1000 now) so that also argues toward a larger mortgage.  (If inflation is the same in both countries the effect is a wash.)  If you don't have the discipline to reinvest the mortgage you won't pay, that also argues for leaving the Roth account alone as much as possible.

Also remember that if you buy the house for cash, you have just changed what is presumably a diversified and liquid portfolio into one that is heavily invested (50%) in a single, illiquid asset.  So there is some risk involved in doing that -- is the house in a good location, will it appreciate or at least hold its value, is the Russian economy and government stable, or is there any risk you could lose the house in a government action or the house will lose value due to being in an unpopular or dangerous neighborhood. 

[bhuether]

Hi, thanks for the thoughts.

In this case, here are some more details:

1. The house will be primary residence and will not be rental.

2. There is to be separate purchase of a studio apartment that I will use as music studio (so, business use).

3. apartments for 1 and 2 above would basically be purchased together, where they would be colocated in same building

4. In foreseeable future (5-10 years), I don't really see the dollar doing poorly against the ruble, and I think there is good reason to believe current favorable USD position relative to ruble will remain or USD position will strengthen

5. Government stability could change, since over next 5-10 years (or even sooner) Russia will see a new president, since most believe Putin is planning his exit within next few years

6. In good neighborhoods in Moscow (we are planning on moving to a district in northwest that seems to be regarded very well), home value seems to remain rather stable, and in general the overall market in Moscow is somewhat expensive as you get to center, and there doesn't seem to be any indication that the market will quickly move in one direction or the other, and so properties not in center, but still in city limits tend to keep value just on basis of relatively high center prices

7. In about 10 years, good chance we will leave Moscow, at which point the apartment(s) will become rental properties or they would be gifted to my (now) 8 year old son if he decides to stay in Moscow.

8. I have pretty good discipline with cash flow (only debt I had over past 15 years has been a car loan that paid off in 2013)

9. Extra cash from lower monthly payments would be largely reinvested so that when we leave Moscow we can buy another property elsewhere as primary residence

Not sure if these answers alter your line of thinking, but really curious if you think it changes something!

Thanks!

[Opus 17]

I'm not going to comment on your additional details; for more personalized recommendations you would want to speak to your own financial advisor. Good luck. 

[Opus 17]

I lied about not commenting.  Your comments raise one point I do want to respond to. 

You know that as long as you are US citizens, you are subject to US tax laws and owe US tax, no matter where you live.  (There are some credits and deductions when you live overseas, but they are still part of the overall tax laws you must follow.)

Gifting the property to your son may not be the best tax strategy.  If you gift the property, then his cost basis is whatever you paid, and not the market value at the time or anything else.  That affects his tax position if he rents or sells the property, and may subject him to higher US taxes than otherwise.  You would want to consult with a professional financial advisor before making that move.