Announcement

Collapse
No announcement yet.

Private family home loan vs bank loan

Collapse
X
Collapse
First Prev Next Last
 
  • Filter
  • Time
  • Show
Clear All
new posts

  • Private family home loan vs bank loan

    I posted this anonymously to the Facebook group but didn't receive any actual answers, only criticism (which is fine) and people answering questions I didn't actually ask. So I will post here where I can hopefully answer clarifying questions to arrive at an answer.



    My wife is a resident and I have an 80k year salary. When we moved for residency we bought a house and couldn't qualify for loans because I wasn't working at the time. My Mother in law graciously stepped up and lent us the amount - about $400k with a 10% down payment @ 4.5% interest rate with no financing fee.

    However, in the terms of the loan there's a clause that says she can force us to re-finance with a traditional lender in 4 years. Now that I have an income and we can qualify for traditional loans, should we refinance? In my view, her loan is only slightly better than a 5/1 ARM but the uncertainty almost makes it a wash.

    We will probably move in 3 years and will either sell or rent out the house but I still think it might be worth it. I have never bought a house through a traditional lender or refinanced so I'm unfamiliar with all the extra hidden costs. I don't think she would be offended if we refinanced but I want to make sure it makes financial sense. We have no kids and no debt beyond mortgage thanks to a grandparent's med school tuition gift.

    ...
    A couple more pieces of clarification, we live in California and cost of living is high. Our house is right around average for this area. Rent for this house would have been around 2800/mo, our neighbor rents his nearly identical house for that amount.

    We will probably move to a smaller California city when she's done with residency. But there's a possibility we could stay.

    Mother in law is also a high net worth individual and does not care one way or the other if we keep this loan with her.

    Thanks in advance, and criticism is welcome but please make it constructive.

  • #2
    I hate to owe money to anyone least of all my in laws. If you have the means I would refinance. It is not like she gave you great terms. You can get close to the same from a bank then it keeps your personal life cleaner.

    Comment


    • #3
      I'm curious what sort of criticism people had of what seems like a very nice arrangement. FWIW, spouse and I did something very similar - borrowed a sizable "bridge loan" from family when moving for residency before spouse had a job lined up. For us, it worked out very well - and I think people may not appreciate the considerable benefits of buying a house with a "cash" loan like this (e.g. - no appraisal, no inspection, close ASAP, no underwriting...)

       

      There is uncertainty with MIL loan, but also some security - presumably she is unlikely to evict you (and her daughter) if something catastrophic happens?

       

      You seem to be leaning towards re-finance. What's driving you toward that? Seems like the major downside would be the closing costs you'll pay (probably thousands, which won't come close to being offset by a marginally lower interest rate over 3-4 years' time)

      Comment


      • #4
        Can you clarify the following on the current loan/home:

        1.  $ amount put down

        2.  Term of the loan

        3.  How many periods into the loan are you?

         

        I think you can beat 4.5% handily, especially with a 5/1 ARM.  And that's before any relationship discounts.  I would do some harder negotiating with various lenders, including Doctor's Loan lenders.MIL's net worth is irrelevant.  The right answer is to refinance regardless of the financials.  However, clarifying the above will help to clarify the financials for you and all of us.

        Comment


        • #5




          I hate to owe money to anyone least of all my in laws. If you have the means I would refinance. It is not like she gave you great terms. You can get close to the same from a bank then it keeps your personal life cleaner.
          Click to expand...


          I agree with the distaste of owing money to in-laws, however, there is something to be said for keeping it in the family, if the family has the means.

          OP, have you checked to see for sure what kind of terms you could get from a traditional lender?  That might influence your opinion.

          Not sure what specialty your wife is going to be, but with zero other debt and being DINKs (for now), you guys should be well positioned to save some money now, maybe even a little loan pay-off fund, and then obliterate that loan with a couple years of attending salary.

          So, unless I really didn't like my mother-in-law (or there was some other stuff like a step-father-in-law coming into the picture or animosity from siblings-in-law), I'd probably just let it ride.  Hey, your interest payments might come back someday to your kids....

          Comment


          • #6
            1) MIL can force you to refinance. Don’t make her!
            2) You didn’t mention amortization or monthly payments. You need to make that happen.
            3) “Hey mom, do you want me to pay you or the bank?”
            If she says bank, refinance it. If she says her, setup the amortization schedule and the auto transfers. Just confirm it with an “Are you sure?”. Let you wife ask.
            MIL’s are great at signaling. She knows the loan costs

            Comment


            • #7
              Your question is very situation dependent.  There is the purely financial answer, and then the purely family answer, and then the real answer which is a balance of both family and financial considerations.

              From a financial perspective, you state there is a good chance you will move in 3 years.  You might look at 3/1 ARMS, the rate will likely be around 3.5% if your credit is now good and you have at least 10% equity.  Then see how much you will save over the 3 years and compare that to your closing costs.  And remember, a dollar in the bank today is worth a bit more than a dollar in the bank in 3 years.  It may not be worth all the work to refinance as the closing costs will likely eat up most of the savings for a relatively short period of time living in the house.  You could also check 30 year fixed rates, but they may be significantly higher leading to less savings.

              From a family perspective, how does your MIL feel?  Would she prefer that you refinance?  Would she prefer that you keep the loan with her?  It might be worth asking directly to see how she feels.  In general, family relationships are complex enough without adding financial dealings to the mix.  So all things being equal, in most circumstances it is better not to mix financial entanglements with family, but at the same time every family is unique and in a minority of these situations, it works out well for all.

              Comment


              • #8
                House is $390k we put down $39k.

                Loan is 30 years

                We are 14 months into the loan and pay monthly.

                 

                The criticism I got was that we made a terrible decision by buying a house, one person even suggesting that we sell it ASAP and then, I assume, he thought we should rent. I get the impression he thought we lived in a Low cost of living area, which was my fault for not specifying. Other people seemed to suggest it was unwise or crazy for the MIL to lend money, that's why I added the caveat that she had plenty of money to lend and we weren't making her live off cat food. The MIL does not care one way or the other. She had just sold her vacation house and was actually looking for a place to put money and a 4.5% nearly guaranteed return and knowing she was helping family made it an easy decision.

                 

                My biggest gripe with the MIL loan is the terms that she can force the loan be paid in full in 4 years (now 3 years). That, to me, almost reads like its a 4/1 ARM but without the benefit of a lower rate. Otherwise, the loan reads like a 30-year loan, which is what we want.

                 

                I was on the fence to refinance because, like some of you mentioned, I don't like being in debt to family. Even though money isn't really an issue, I don't like having that hang over my head. I also thought that we could lock in a lower rate, but I am unsure how much that'd really save us if we ended up deciding to sell in 3 years. So if the savings is less than 5k then I don't think it's worth it.

                 

                Thanks again for your responses.

                 

                Comment


                • #9


                  I also thought that we could lock in a lower rate, but I am unsure how much that’d really save us if we ended up deciding to sell in 3 years.
                  Click to expand...


                  probably not much savings...


                  I don’t like being in debt to family. Even though money isn’t really an issue, I don’t like having that hang over my head.
                  Click to expand...


                  ...but some things are priceless!

                  Comment


                  • #10




                    However, in the terms of the loan there’s a clause that says she can force us to re-finance with a traditional lender in 4 years. Now that I have an income and we can qualify for traditional loans, should we refinance? In my view, her loan is only slightly better than a 5/1 ARM but the uncertainty almost makes it a wash.




                     

                     

                    My biggest gripe with the MIL loan is the terms that she can force the loan be paid in full in 4 years (now 3 years). That, to me, almost reads like its a 5/1 ARM but without the benefit of a lower rate. Otherwise, the loan reads like a 30-year loan, which is what we want.
                    Click to expand...


                    Click to expand...


                    I'm confused why you have this poison pill of your MIL being able to force loan payment?

                    If everything is sweetness and light why on earth have a clause like this? It comes down to the simple fact that if this is really workable from a relational standpoint why do you have language like this in the note or if it's there as part of some standard agreement why are you worried about it? I would not borrow money from my in-laws despite our wonderful relationship, but if I had to for some reason I wouldn't have any fear that they were going to pull some odd lever and leave me in the lurch.

                    The fact that you've brought it up twice makes me think that you aren't sure she isn't going to force this? If you aren't sure why not just re-fi?

                    Comment


                    • #11
                      MIL signaling clearly.
                      “I’m confused why you have this poison pill of your MIL being able to force loan payment?”
                      She wants her money back after the residency is done. A little wiggle room. She means you are on your own. The clock is ticking.

                      Comment


                      • #12


                        If everything is sweetness and light why on earth have a clause like this? It comes down to the simple fact that if this is really workable from a relational standpoint why do you have language like this in the note or if it’s there as part of some standard agreement why are you worried about it?
                        Click to expand...


                        She specifically asked that this clause be included. She's somewhat impulsive and profit-driven so I think if she comes across a different investment opportunity that she liked better then she would pull that lever. If/When that happens, she knows we'll be ok because her daughter will be earning an attending salary. I also get the impression that she doesn't want us turning her money into an investment property. So I think she pulls that lever if we decide to keep it as a rental. Which I'd say is 50/50 at this point.

                        Comment


                        • #13




                          My biggest gripe with the MIL loan is the terms that she can force the loan be paid in full in 4 years (now 3 years).
                          Click to expand...


                          ElephanHat, this statement you made says a lot about how you feel.

                          It is uncomfortable for you that dear MIL has this statement in the loan agreement so that she can call the loan, pull out the rug from under you.  It means she has power over you and your family.  Maybe you should just refinance and be free of any family business ties?  Or maybe you should ask about that clause, "Would you be wanting us to find another loan as the loan documents specify that we might need to refinance to a conventional mortgage at the four year mark?"

                          What was MIL's thinking when she put that in the loan documents?  Was that the advice of her attorney?  Is she thinking this is not a good long term situation?  Was her attorney thinking this is not a good long term situation?  Is she going to be disappointed to lose the 4.5% performing mortgage when you go ahead and refinance without asking for her preferences first?

                          My general principal is direct, honest communication, ask questions first to understand the other person's perspective, ask if they have any preferences one way or the other, and then after understanding their perspective, share your own concerns.  But again, this whole situation is typical for mixing family and money, it gets quite complicated.

                          If you feel better having your own loan on your own terms without any complications, then just state "We would like to get a conventional mortgage loan and pay off the balance we owe you.  Would that be ok with you?"

                          Comment


                          • #14






                            She specifically asked that this clause be included. She’s somewhat impulsive and profit-driven so I think if she comes across a different investment opportunity that she liked better then she would pull that lever. If/When that happens, she knows we’ll be ok because her daughter will be earning an attending salary. I also get the impression that she doesn’t want us turning her money into an investment property. So I think she pulls that lever if we decide to keep it as a rental. Which I’d say is 50/50 at this point.


                            Click to expand...


                            Get out.

                            Comment


                            • #15


                              House is $390k we put down $39k.
                              Click to expand...


                              Do you mean the purchase price of the home was $390k and the loan is $390-39 = $351k?

                              Comment

                              Working...
                              X