Borrowing From A Mom and Pop
Like many young couples, Tom and Rebecca Miller were struggling to buy a first home for themselves and their young twins, Benjamin and Luke.
Two years ago, they found a four-bedroom, 2 1/2 -bath brick Colonial far enough out in the suburbs of Boston to be affordable, though just barely. "The only way we could break into the market as a young family was to leverage ourselves to the hilt," said Tom, who grew up in Silver Spring.
And leverage themselves they did, with mortgage payments fixed for seven years and an adjustable-rate home-equity line. Affordable at first, the equity-line payments more than doubled as interest rates went up, straining the young couple's resources.
That's when they turned to what's often referred to as the Bank of Mom and Dad.
Although it's not without pitfalls, intra-family mortgage lending can be beneficial for borrowers, who may get a break on interest rates, and lenders, who may be able to earn a good rate of return on a generally secure investment, experts say. Especially if the parents have their retirement funds or other savings in relatively low-paying certificates of deposit or money market funds, "this is an opportunity to earn a whole lot more" and still cut your kids a break, said Pat Vredevoogd Combs, president of the National Association of Realtors.
A 2006 survey by the trade association found that 9 percent of first-time home buyers borrowed from friends or relatives for their down payments.
Tom Miller's parents stepped in with a loan to replace the increasingly unaffordable home-equity line.
Miller, 34, said he wanted to set up the loan as formally as possible to provide discipline for repayment. To do so, he turned to a Boston area company called CircleLending for help. "The key is, it had to be set up as a mortgage, and my parents had to have a legal claim on the house," Miller said. That allowed the Millers to obtain a low-interest loan and also keep the tax benefits from mortgage interest-rate deductions.
Miller works for a specialty chemical company, and his wife, who is expecting their third child, stays home with the twins. Miller's parents are semi-retired. His father, Hubert, is a former employee of the Nuclear Regulatory Commission who does consulting. His mother, Kate Miller, just completed writing and illustrating a book of poems for children, titled "Poems in Black and White." Tom Miller said the interest rate was around 3 percent, about the same as what they earned on their savings accounts.
"My parents are pretty fortunate," Tom Miller said. "I think they could probably stand to lose the money. It's not like they are going to be eating macaroni and cheese in their retirement. I'm unquestionably very fortunate to have the parents I do -- first and foremost emotionally, and, secondly, in their financial situation and the flexibility they have."
"We had kind of perverse negotiations, where I said, 'Why don't I give you 6 percent?' and they said, 'How about zero?' " he said.
Intra-family loans "make a lot of sense, if you've got responsible people on both ends of the transaction," said Mary A. Malgoire, president of the Family Firm, a financial services company in Bethesda. But she warned that anyone entering into such a transaction should think about how the parties would feel if problems arise.