Family Loan - the other side

[Hoerwolle]

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.

[YTProphet]

I just did this and finished paying my MIL back. I would not recommend it. It puts a strain on the relationship even when you're making payments on time and/or paying the loan back early (like I did). You literally owe that person something and it tends to effect other, completely unrelated aspects of the relationship.

Why not just save up a 20% downpayment? If you can't do that over the course of 5 years, you probably shouldn't be buying a house.

[Hoerwolle]

Sorry if that was unclear - the 30/70 split meant approxmately 30% downpayment, 70% loan. I plan to have at least 25% of the price as downpayment (without corrupting my emergency stash) - and I plan to have that ready in 5 years. Actually, I expect it to be more or earlier, but I tend to plan conservatively.

[MayDay]

A friend did this with her MIL. They had absolutely no issues and the loan is long since paid off. It may have been helped by the MIL offering to just give them the money outright, so she was not scrutinizing their finances.

[Retire-Canada]

Personally I wouldn't want to have such a big loan in my family, but that's me.

If you can put down 10% extra per year on the mortgage that seems pretty good. Unless interest rates in Germany are radically different your money is better off in stocks for the next while anyways.

Ultimately you need to decide if the money saved in interest/fees is worth the hassle of borrowing from family.

I'd rather be independent of my family unless it was an emergency. That means something to me and is worth some extra costs.

-- Vik

[ShoulderThingThatGoesUp]

My SIL fronted us our entire house because she doesn't like investing. But our other house was on the market and we repaid her as soon as it sold.

[mandy_2002]

Classic engineering answer:  It depends. 

A lot of it depends on the attitude of the lender (i.e. why are you going to Paris when you should be paying me back faster?...).  However, I think a big part of it can be the other members of the family.  Would other siblings be offended by this agreement?  Clear terms and an open repayment may be able to alleviate this, especially in the case of an untimely passing.

As an example, the parents of a friend lent each of their daughters up to $15,000 to buy their first car.  All three took them up on this offer.  The oldest paid the loan back in 2 years, the middle has had the car for 5 years, and still has about 5 years of payments left, and the youngest is on track for a 4 year loan period.  The parents don't have an issue with the middle daughter since it was their offer, but the older sister sees what the middle is doing with the rest of her money and judges her pretty badly on it.   

[ShoulderThingThatGoesUp]

My SIL fronted us our entire house because she doesn't like investing. But our other house was on the market and we repaid her as soon as it sold.

Also, we put her name on the deed and did a $1 transfer when we paid her back to take her name off the deed. So if we had gotten hit by the bus, the house would have been hers.

[TN_Steve]

My SIL fronted us our entire house because she doesn't like investing. But our other house was on the market and we repaid her as soon as it sold.

Also, we put her name on the deed and did a $1 transfer when we paid her back to take her name off the deed. So if we had gotten hit by the bus, the house would have been hers.

Agree with the "it depends" answer of Mandy_2002.  :-)  Also second Shoulder..'s thoughts.  If you do it, document and have MIL's name on title as secured lender (however that is done in Germany).  We are doing something similar with son's law school living/book/etc. expenses; lent him the money for his signed promissory note, and he makes monthly interest payments while a student, with full repayment as detailed in the note.  This does away with any later misunderstandings....

[Villanelle]

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. 

[robbyho]

I'm a Realtor and I've had this happen with clients and their family members. What has worked in the past is they agree on an interest rate lower than what the banks are offering. If things ever go sour, you can always refinance and pay off the loan.

[10YearGoal]

As Dave Ramsey says, it makes Thanksgiving dinner not taste as good, or something like that.

I lend money knowing that I can take the hit if it doesn't get paid back, and I borrow money only if I am absolutely sure I can pay it back. We borrowed money from my mom to buy my husbands truck at her insistence. We paid it back over a few years and I didn't think about it any more than my other bills, but we have a great relationship. She has let other sibs borrow large sums of money (10-20k) and has not been paid back. It doesn't seem to bother them but I know I am not built like that.

That's what I would do...imagine yourself owing this person a large sum of money and what that would feel like in a variety of moods, time frames, potential disagreements, etc. In the end only you and your wife will know the answer.

[Hoerwolle]

Hi again!

Thanks for all your answers, they mostly fit with what I was thinking anyway. I know that I want to be sure to be able to go another route if things go south, that's why I wrote that we would be able to get a bank loan. And that's a freedom I wouldn't want to miss.

[thedayisbrave]

It definitely depends on the relationship dynamics.  I've done this with my mother with no bad blood between us (caused by finances at least). I offered to pay interest as if it were a true bank loan but she refused and said something about it'd be my money soon enough anyway.  Though I'm single, I think I'd be a little more hesitant to go with the hypothetical MIL unless she and/or SO were super gung-ho about it.  And if it were to occur, I'd definitely want to be on fair terms to both parties so nobody is feeling like they got taken advantage of.