Need Help with a Mortgage Loan? Try the Bank of Mom and Dad

Here's an interesting piece courtesy of ARA Content on interpersonal loans. I had no idea there was this much activity in person-to-person loans and I'm not sure I'd recommend it (one way to quickly kill a relationship is to lend someone money.) But still, I was intrigued at the vastness of this method (10 million people). The details:

News headlines continue to detail the struggles homeowners face keeping up with escalating adjustable rate mortgage payments, the collapse of subprime lenders and mounting home foreclosures nationwide. Even without these market troubles, banks offer so many different and confusing mortgage products that it’s hard to know what’s in the homebuyer’s best interest. These days, choosing a mortgage is a daunting experience for first-time homebuyers.

Increasingly, homebuyers are rediscovering an old option for financing their mortgage, one that sidesteps the confusion, paperwork nightmares and threats of skyrocketing variable interest rates: They’re taking out a private mortgage from the Bank of Mom and Dad.

A private mortgage is a home loan from a relative, friend or other individual that is secured by real estate. A private mortgage (also called an intra-family mortgage) can provide the structure of a bank mortgage while retaining the flexibility associated with loans between relatives and friends, resulting in a win-win transaction for both the borrower and lender.

Interpersonal loans between relatives are not unusual -- more 10 million individuals in the United States are engaged in interpersonal loans at any given time. Used for home financing, private mortgages provide compelling benefits to both the borrower and lender. The borrower can realize thousands of dollars in interest savings and tax deductions, while the lender can benefit from a monthly income stream and a predictable rate of return that is potentially higher than would be obtained through savings accounts or other fixed income investments. For both, a private mortgage helps keep wealth where it belongs -- in the family.

CircleLending, a financial services company that is regarded as the market pioneer for designing private mortgage services for the masses, recognizes that there is a great need for non-traditional financing in today’s market. According to Jim Smith, vice president of CircleLending, private mortgages are used in the same ways as traditional bank loans:

1) Purchase a home: Private loan capital can be used for the entire purchase of the home, the down payment or to supplement bank financing and avoid paying Private Mortgage Insurance (PMI).

2) Refinance a bank mortgage: A private loan can be used to refinance an existing mortgage, lowering the interest rate, eliminating PMI, keeping interest payments within the family or to achieve other favorable terms.

3) Formalize an existing home loan from relatives: Home loans from relatives made in the past can be formalized to take advantage of tax benefits such as interest deductibility and capital gain write-offs

4) Renovate a home: Private loan money can be used in place of a home equity or other higher-cost home improvement loans.

5) Owner-finance a home: A seller can finance the transaction by making a private loan, allowing the buyer to pay all or part of the purchase price over time.

With a private mortgage you don’t need to apply, qualify or pass a credit check. You just need to find a relative or friend willing to finance your dream. Typically, a mortgage from a relative or friend is more affordable, more accessible and more patient than most of the borrower’s traditional financing options.

CircleLending provides a full range of services for reducing the financial risks, administrative hassles and emotional pitfalls of private loans. To learn more about private loans and mortgages, visit www.circlelending.com.

Comments

[Jonathan]

FMF,

I have some experience in this area.

My wife and I borrowed $28,000 from my parents in 2005 to purchase our 1st home. Repayment was to be at 4.2% over 5 years. We payed if off early in only 2 years.

Perhaps not such a "wise" financial decision, though, if I could have been making 5%+ and earning interest off the float? But that's not the point.

Since taking out the loan I didn't like the feeling of being indebted to family for money. To owe a debt of gratitude, thankfulness, and affection, yes, but not money! So while paying off the loan early might have set us back a bit, I am glad we did it.

Overall, I think if you *need* help from Dad and Mom to buy the house you are looking to get into, you should probably look for a cheaper house or save up your own cash for a while longer. This is what we *should* have done. But hindsight is 20/20.

Jonathan

[Q at $1 Million to My Name]

My grandpa gave a loan to my dad, which he never made him pay back. My dad talked about doing it, but never did. Dang!

[Maria Palma]

Mom and Pop would be my first choice - that is, if they have the money...and will be supportive if somehow you couldn't make a payment. After all, family is supposed to be there to help in any way that they can.

[rf]

Whatever you do, make sure you shop mortgage rates and speak to a number of different lenders before you do anything.

[Chris]

Interesting concept. I wonder though, looking through the information they have on their website, what the Handshake basic does that you can't already do on your own. Blank documents like these can be found at office supply stores, etc, and in most states are legally binding. What does your $99 get you?