Hello Fellow Mustachians!
I recently convinced my wife that owning a house can be a financially sound possibility and now I am pondering about financing it. We are in no hurry, I plan to buy / build roughly in a 5 year timeframe. Until then we will have a considerable downpayment ready, but would still need a substancial loan (approx 30% / 70%). We would qualify for a bank loan with a decent interest rate (good downpayment, stable jobs, good credit history, etc).
Now the idea of a loan inside the family:
I am pretty sure my mother-in-law could borrow us the money - I would not want it for free, but this would save us quite some fees and maybe give us also a better bargaining position for the house, if we can pay "cash". On top we could easier agree on extra payments whenever possible (usually bank loans in germany allow you only a certain amount per year, 5-10%). The house would be a good collateral, even a necessary emergency sale should yield enough to return the loan completely, since the housing market in our region is very stable.
What do you think of this idea? Or is it always a dumb idea to borrow money within the family? Would this also attach "too many" strings to my MIL? Anyone has experience with something like this?
I am a bit sceptical if I want to go this way, but it is financially interesting.
I've done (and am still doing this).
Our first house was actually the house my dad inherited from his mother. He sold it to us, and instead of getting a bank loan, we just made payments to him. We filed a lien on the property to make it official, he claimed the interest as income and we paid him fair market value, but just barely. Basically, it was the lowest possible interest rate we could find anywhere. At the time, I think it was 5.75%. We were happy as we saved a bit of money on fees and perhaps a small amount on interest. He was happy because he was getting a decent return on his investment, and the money--which he didn't need--was all staying in the family. My dad likes to say our interest payment are in essence just paying to increase my inheritance. He also didn't have to worry about rebalancing and it gave him a bit more portfolio diversity.
When we moved to a more expensive house, we kept that loan and only financed the increase in price. (We refiled the lien so it was on the correct property.) Interest rates had dropped so we refinanced the Dad Loan to a lower rate.
Fast forward some years, and interest rates had dropped even more. However, we didn't qualify to re-fi as our property is no longer owner occupied since we live overseas. So we refinanced again, though the Bank of Dad. He gave us the money to pay off the loan we owed to the bank. We took the amount we owed him from the original loan (which at that point was ~12 years old) and the amount we had owed the bank, rolled it in to one loan with a new lower interest rate and an agreed up term that put the payment where DH and I wanted it to be.
It probably isn't for everyone. My dad wouldn't have done it if he didn't know we were responsible, and maybe also had he actually needed that money. It also worked because he was very, very clear up front that this should be treated like any formal loan, and there would be no "but we came up short this month" conversations. Because there was a set payment amount, a set due date, and a set interest rate, there was really no room for them to scrutinize our finances in light of what we owed. As long as we met our commitment to them, they had no reason to look at the new sofa we bought and contrast that with what we owed.
Really, I don't see a single downside for us (my parents and DH and me). Everyone seems to win.
He may be getting a smaller % in interest than he'd see in the stock market, but my money is going to the family, rather than to BigBank, so the overall growth of the family wealth is almost certainly better. If he got 7% in the stock market while I was continuing to pay 5.125% to the bank (since I couldn't re-fi), the overall effect would be less money in the family coffers. Since my parents don't need the money, they consider this a win.
I do think this depends on your relationship with your MIL, however.