Using an interest-free loan as a downpayment on a house

Question

My wife and I bought our house in Dec 2010 using the U.S. Federal Government's Neighborhood Stabilization Program, which essentially resulted in our city (Phoenix) giving us a $15,000 loan to cover closing costs and down payment on the purchase of a home, provided the home was to be our primary residence, in the city limits, and in foreclosure.

The loan is interest-free, and is payable when we move, refinance, or after 45 years.

We bought a house for 1/3 of what it sold for in 2006. It has needed few repairs, came will all the appliances we needed which are top-of-the-line, and generally is serving us well. We both regard it as, on the whole, a good purchase.

The thought was we would make back the $15,000 when we sold this house, sometime 5-7 years from now. We are bolstered by the understanding that Phoenix is an especially depressed market, and we expect prices to rebound in that timeframe. Ideally we though the house could go back to 2/3 of its 2006 sale price.

Two questions:

1. I understand, from a purely financial standpoint, it is not a good idea to pay for a loan with another loan. However, is our goal of recovering the $15,000 loan by selling the house in 5-7 years reasonable?
2. Given the opportunity, would you do this? Is this a good decision (from a purely financial standpoint)?

Answer 1

1.) Depending on your loan and assuming housing prices do not fall dramatically further, you will almost certainly have accumulated 15k in equity in 5-7 years and will be able to pay list loan out of proceeds from the sale.

2.) I would certainly do this, but it would not really alter how much I thought the house was fundamentally worth. IE I wouldn't bid more than I would have otherwise without this program, but I would certainly be willing to consider the location more if the grant was available.

Answer 2

1. If the loan is interest free its basically a free money, so I see no reason for it not to be a good idea.

2. Definitely. I would put my own cash to work elsewhere.

Goes without saying that I would not move to Phoenix just to get this loan, but if I was there anyway and intended to stay for a significant period of time, like you, I would undoubtedly do the same as you did.

Answer 3

The idea of the grant was that it would be used for the purchase of a home rather than a house. That the purchaser would live in and enjoy the home, and in the process improve their neighborhood.

If I was looking for an investment then, No I would not buy the property under those conditions. The market is still not stable, the house has already lost 2/3 of its value there is nothing to promise any ROI other than hope. I do not think that it is a reasonable expectation for the value of the home to double in the next 7 years especially with the economic uncertainty we currently face.

If I was looking for a home and I could see myself settling down and raising my family(for the next 20+ years if needed) then absolutely assuming that the my payments and expenses were affordable at my current salary. Being mindful of, if the property value does double the taxes on the property probably will too. I would not want to buy a house I could not afford at what I feel the going rate should be. I would buy a great house that I can afford at normal value for a steal during a depressed market.