We’re moving into a $3.5 million house, and my in-laws are offering a seven-figure ‘advance’ – is debt-free really the best path?

If there’s an option to go down a debt-free path, it’s almost always the better choice, at least in my humble opinion. The heavy burden of interest can really add up, especially in the early days of a hefty mortgage loan, when more of one’s monthly payment goes towards chipping away at the interest rather than the borrowed amount itself.

In any case, this piece will focus on the specific case involving a Reddit user who’s moving to an absurdly expensive home worth around $3.5 million. They’re fortunate enough to have wealthy, and very generous, in-laws who are offering an “advance” to help them purchase the home. Whether the so-called “advance” is more of a gift than a loan, though, remains the big question.

A generous “advance” from a loved one.

One Reddit commenter astutely pointed out that even the money would be theirs in the long haul anyway, and to treat the amount as an early inheritance of sorts.

Indeed, I’m mostly in agreement with this. When one loans money to family members, it should be treated as a gift, rather than a loan, given that nobody wants to hurt that sacred relationship around the dinner table during Thanksgiving or any similar gathering. It’s just not worth it. In any case, a financial advisor should always be consulted before signing the dotted line on a home purchase, especially one that’s worth many millions.

In short, it’s my opinion that taking the so-called “advance” (it’s more of an advanced inheritance) is better than taking on mortgage debt from a big bank, especially at a time like this.

A generous gift or an interest-free loan?

Regardless of whether the generous advance is a gift or an interest-free loan, I’d take the offer if I were in the Reddit user’s shoes. It’s far better to be indebted by a loved one who’s more than willing to change terms as needs change than a bank. Of course, if the parents-in-law depend on a loan repayment (they should be fully aware of the risks and creditworthiness of the Reddit couple by now) for their retirement, things could get rather messy.

In such a scenario, it could make sense to go for a smaller, more affordable home. Just because you can afford more home (even if we’re talking an all-cash payment) does not mean you should go for as much home as possible. Indeed, the difference could have been invested in a diversified portfolio of high-quality stocks that may very well produce a nice, growing passive income stream.

Additionally, if the overly generous in-laws are sacrificing their retirement lifestyle for a home purchase, it makes sense to meet at some sort of middle ground. Perhaps a $1.5 million home can be targeted while the “advance” is invested in income-producing securities or something as simple as an S&P 500 ETF.

At the end of the day, it’s only prudent to diversify across asset classes, rather than putting millions of one’s own money and one’s parents’ money into a single asset category. Just as you wouldn’t borrow to invest in a single stock, you probably shouldn’t borrow to fund the purchase of a home that one probably couldn’t afford to begin with. Indeed, for such a luxurious, large home, the maintenance costs, property taxes, and insurance bills can quickly add up. Not to mention the invested sum that could be at risk in the face of a housing market meltdown.

The bottom line

All considered, I’d accept the “advance” and say “thank you.” However, if possible, I’d consider alternative options that don’t entail potentially having to jeopardize the in-laws’ retirement prospects. At the end of the day, it’s good to avoid debt, but it’s not always a wise idea to over-stretch oneself beyond one’s means. Not everyone is going to be comfortable taking obscene sums of money from parents to fund a purchase of something that one doesn’t necessarily need.

The post We’re moving into a $3.5 million house, and my in-laws are offering a seven-figure ‘advance’ – is debt-free really the best path? appeared first on 24/7 Wall St..