When to buy-out employer subsidized mortgage?

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Topic Author
epoche
Posts: 159
Joined: Sat Jul 31, 2021 12:57 pm

When to buy-out employer subsidized mortgage?

Post by epoche »

This could broadly fall into the “whether to re-finance” category, but has enough wrinkles and complications that I thought it worth posting separately.

I have an employer-subsidized mortgage, wherein the employer effectively owns 50% of the house, but because of my down-payment, pays 77% of the principal and interest. I am solely responsible for all taxes, insurance, and maintenance costs. This arrangement will continue for the 30-year mortgage term (27 years remaining) or until I sell the house, buy out the employer’s portion, or upon a separation of service. In the event of sale, buyout, or separation, the employer gets 50% of the sales or appraisal price (if house has increased in price) or 50% of the original purchase price (if house has gone down in value). If I make an improvement to the house that results in a higher selling or appraisal price, I am effectively gifting 50% of that improvement to the employer (I don’t have any foreseeable plans to do this!). I am not allowed to prepay my portion of the mortgage while the employer’s ownership interest is in place. Any selling expenses and taxes from a sale would be solely my responsibility.

Some additional details:
Interest rate on the mortgage is 4.25%.
Current tax bracket 32% federal, 6.33% state.
I already itemize on the basis of my other deductions and the 23% of the mortgage interest that I pay.

I had to qualify for the full mortgage without reference to the employer payments, so I can afford to carry the full loan (and doing so should not impact my contributions to after-tax accounts). Based on recent comparable sales, the value of the house is currently about 5-10% greater than our purchase price (after 3 years of ownership). Prior to the COVID real estate market, I was expecting near 0% appreciation based on the local market and long list time of houses. I currently expect to want to be in the home for the next 9-12 years at minimum, and would like to plan for the likelihood that I will decide to voluntarily separate from the employer prior to that timeframe but want to keep the house.

I have built up a somewhat larger than normal fixed income allocation (about 7% larger than my targeted 80E/20FI mix at this point) as a reserve against having to buy out the employer due to potential of forced or voluntary separation, which imposes something of a drag on returns.

I have realized that, while I am able to invest the employer-paid principal and interest payments, this is somewhat offset by my increased fixed income allocation. Further, this arrangement limits my ability to refinance my portion, and introduces a potentially expensive and unpredictable exit cost should I leave the employer but want to keep the house. Under a range of circumstances, my (possibly over-simplistic) models suggest I should keep the arrangement for at least several more years. That implies I should just keep it as is, reduce my fixed income back to normal levels, and take the risks of rising rates and higher than expected home value appreciation if separation were to occur early. But truthfully I’m having some difficulty wrapping my head around the multiple variables involved, several of which are non-controllable unknowns (future interest rates, house appreciation, inflation, investment returns, etc.).

Hence the question in the title of the thread.

I’m hoping for some input on aspects I may be missing, or whether I’m under-weighting the certainty of obtaining a low-interest refinance now. If I fully owned the mortgage, I would have already refinanced. The key question is that there is a very high likelihood I will want/need refinance before the loan term is up, so when is the appropriate time to do so?

Thanks in advance!
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Ralph Furley
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Re: When to buy-out employer subsidized mortgage?

Post by Ralph Furley »

This is an interesting one.

On the one hand, it's a pretty sweet deal that you are only paying 23% of the Principal & Interest each month, even with you paying 100% of the Taxes and Insurance. I would like that.

I would not like the interest rate, while lower rates have been available. I would not like feeling like I can't improve the property - or at least that it would be financially unwise to do so. I would not like only receiving 50% of the appreciation. I would not like the lack of control.

Would a buy out involve refinancing the property at that time, or would you retain this mortgage somehow? It seems that you could be placed in a tough spot of separating, voluntarily or involuntarily, and then need to qualify for a mortgage at a time when you might be temporarily unemployed. Could that happen under the current arrangement?
123
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Re: When to buy-out employer subsidized mortgage?

Post by 123 »

A couple of general questions:

Are there many other employees of this employer that have similar home ownership sharing arrangements?

Was the arrangement part of an employment agreement (i.e. were you a new hire when the arrangement materialized)?

If you home in a major city/metropolitan area or is your home in a very rural/isolated area?

What was general purchase price of the home? $100K, $250K, or $2 million+ ?

Are you married? Is your spouse part of the home ownership matrix? (Could be a mess if there are marital difficulties)

Does any part of the employer's participation in your home ownership materialize into your W-2 taxable income?
The closest helping hand is at the end of your own arm.
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Watty
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Re: When to buy-out employer subsidized mortgage?

Post by Watty »

epoche wrote: Sat Jul 31, 2021 1:12 pm I’m hoping for some input on aspects I may be missing......
How would this work if you are laid off?

It sounds like you would in a catch 22 situation where you would need to buy out the employer, but you would not be able to get a new mortgage because you were laid off. If you do not have enough cash to buy out the employer then you might be forced to sell the house at a bad time.

It would also be good to look at how this would work if you are disabled.

I am not an accountant or a tax expert but it sounds like there is some risk that you could be audited and risk owing a lot of back taxes and penalties, or even criminal charges, if this really should be considered additional compensation. Did you have your lawyer review this? There are some high profile cases in the news where people are in trouble for trying to avoid taxes by "creative" housing arrangements with executives.

One other risk is that if inflation get higher then this could be a form of golden handcuffs since you might need to refinance the house at a high mortgage rate if you leave the job.

Yet another risk is if the company runs into financial trouble this could give them an incentive to let you go. For example if they need to choose if they should lay off you or someone else that gets the same pay, then may choose you since they would get a big chunk of cash back from the house.

It is way too complicated for me to tell if it really a good deal or not.

There is an old quote, “If you've been playing poker for half an hour and you still don't know who the patsy is, you're the patsy.”

As far as I can see the company has zero risk and you are paying an above market interest rate.
Ping Pong
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Re: When to buy-out employer subsidized mortgage?

Post by Ping Pong »

This arrangement may have been in lieu of a higher salary. Maybe you can negotiate for a higher salary in exchange for ending the arrangement.
awval999
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Re: When to buy-out employer subsidized mortgage?

Post by awval999 »

Regardless of the finances, I wouldn’t feel comfortable with this arrangement and would refinance immediately.
Topic Author
epoche
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Re: When to buy-out employer subsidized mortgage?

Post by epoche »

Thanks for the replies so far.

Many of the concerns regard the risks, especially related to forced separation and incentives for employer to do so. I am definitely aware of this and my increased fixed income allocation is a response to this risk. I currently judge it as a low risk for a variety of reasons. The questions of legal risks seem accounted for; it is a common arrangement for new hires, is recorded with the county with my deed and mortgage, and I receive a tax letter that is filed with the IRS every year. It does not flow through my W-2. The employer has a housing office to deal with these arrangements and the related reporting.
123 wrote: Sat Jul 31, 2021 11:45 pm A couple of general questions:
For the questions not answered in the above, the house is in a well-developed suburban area; the amount to be refinanced would be close to the $750K deduction cap; not married.
Ralph Furley wrote: Sat Jul 31, 2021 10:07 pm I would not like the interest rate, while lower rates have been available. I would not like feeling like I can't improve the property - or at least that it would be financially unwise to do so. I would not like only receiving 50% of the appreciation. I would not like the lack of control.

Would a buy out involve refinancing the property at that time, or would you retain this mortgage somehow? It seems that you could be placed in a tough spot of separating, voluntarily or involuntarily, and then need to qualify for a mortgage at a time when you might be temporarily unemployed. Could that happen under the current arrangement?
You've pretty much captured my feelings about it. I purposely chose a property that had been renovated so as to avoid feeling like I'd want to improve it. The lack of control is a major drawback.

Any alteration of the agreement would be through a buyout/refinance, I can't retain the current mortgage. And, yes, theoretically possible for me to be forced to sell or refinance at a bad time.
Watty wrote: Sun Aug 01, 2021 12:25 am One other risk is that if inflation get higher then this could be a form of golden handcuffs since you might need to refinance the house at a high mortgage rate if you leave the job.

As far as I can see the company has zero risk and you are paying an above market interest rate.
It is definitely a form of golden handcuffs.

When I entered the agreement, this was exactly my attitude - what a great deal for the employer! As I've seen it in operation, I view it as analogous to getting a 0% APR adjustable mortgage (with no cap on the adjustment) for 1/2 of my living space. Basically I'm paying in forgone appreciation. But I think there is a real consideration as to what percent higher than-market rate would you pay to defer 77% of the interest? Maybe the answer is lower than the math would otherwise suggest due to the additional risks involved.

Still considering...
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Beachey
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Re: When to buy-out employer subsidized mortgage?

Post by Beachey »

What happens if you continue to work for this employer for another 27 years and pay off the house. Does the employer still own 50% or do you own it free and clear? I am familiar with some California public universities subsidizing housing for their employees. Some of the decisions might be driven if it was a MegaCorp with the typical tenuous job security or a job where you have tenure and stronger job security.
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gr7070
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Re: When to buy-out employer subsidized mortgage?

Post by gr7070 »

Any chance you can renegotiate the terms, specifically the agreed upon interest rate?
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Watty
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Re: When to buy-out employer subsidized mortgage?

Post by Watty »

epoche wrote: Sun Aug 01, 2021 1:16 pm Basically I'm paying in forgone appreciation.
Don't ignore the risk that the home price could decline.

I cannot predict the future but many home markets are pretty bubbly and price declines of over 20% are not all that uncommon.

It also sounds like you would also have to pay all the closing costs including commission to sell the house so you might effectively have to pay a 6% on both your half of the sale and their half so that would effectively be a 12% commission on your half. For example a 6% commission on a $200K house would be $12K but you only get $100K from the sale so you would have to pay a $12K commission out of your $100K. Ouch!

A big reason that home prices are so high right now is you can get a mortgage at less than 3% and that will not last forever.

Take a look at what the house was selling for 10 years ago to get an idea of what your downside might risk might be.
Topic Author
epoche
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Re: When to buy-out employer subsidized mortgage?

Post by epoche »

Beachey wrote: Sun Aug 01, 2021 1:59 pm What happens if you continue to work for this employer for another 27 years and pay off the house. Does the employer still own 50% or do you own it free and clear?
Yes, they would still own 50% in that situation, which I'd either have to buy out or refinance at current appraisal, or sell and pay them half.
gr7070 wrote: Sun Aug 01, 2021 2:32 pm Any chance you can renegotiate the terms, specifically the agreed upon interest rate?
No way, no how. It is a one-time deal available only at time of hire. No alterations to the terms are allowed.
Watty wrote: Sun Aug 01, 2021 2:53 pm
Don't ignore the risk that the home price could decline.

I cannot predict the future but many home markets are pretty bubbly and price declines of over 20% are not all that uncommon. A big reason that home prices are so high right now is you can get a mortgage at less than 3% and that will not last forever.

Take a look at what the house was selling for 10 years ago to get an idea of what your downside might might be.
Exactly. The estimated price 10 years ago was about the same as our purchase price (despite it having been renovated), which is why I was assuming 0% appreciation prior to the recent run-up. The terms are actually a better deal for me if the house value remains flat until after I buy them out. But I realize home value could go down, in which case I hold all the risk until it has declined by 50%. But I also realize that I am exposed to a home price decline if I held the entire mortgage, and perhaps moreso if I buy them out now at what might be a higher than usual price. The risk of having to refinance at increasing rates could be somewhat offset by a reduction in home value back toward the original purchase price (and therefore less principal to be refinanced) in the situation you raise.
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