Wynne Crisman had decided to finance his family’s new home with a 5 1/8-percent loan from Wells Fargo when his father called with a better idea. Why not borrow the money from him at 4.65 percent?
“My father had read about the idea in the San Francisco Chronicle, and he wanted to help out,” Crisman said. The Colorado Springs software developer, 31, and his wife, Sarah, 29, now make monthly mortgage payments to Dad instead of the bank, and all parties like the arrangement.
The Crismans saved money on the deal and have some flexibility if they want to pay more – or need to pay less – some months. Crisman’s dad has more than doubled the return on money he had been keeping in a savings account.
“It’s great for me because I’m hoping to start my own software company soon, and my income may not always be stable,” Crisman said.
Welcome to the Mom and Dad Bank, an institution that has been around for as long as there have been mortgages, kneeling pads and double-digit interest rates.
But with home prices rising and downsized baby boomers looking for ways of investing profits from the sale of the big family house, loans between family members are becoming more and more common. Still, mixing family and money can bring its own problems, experts warn.
How do you pester a kid who doesn’t pay on time? Does taking Dad’s money give him more say over other parts of your life? And what about the kid who apparently can’t make a payment but has plenty of money to eat out and take vacations?
Asheesh Advani runs a company called CircleLending that facilitates such arrangements. He said the number of intrafamily loans he has facilitated has increased 25 percent per quarter for the past 12 quarters and that his clients aren’t just the filthy-rich, old-money, country-club set that you might expect.
A growing number are the “mass affluent,” people who have at least $100,000 of investable assets. “I think we’re at the right place at the right time,” he said.
Pending changes in bankruptcy laws that will make it more difficult for people to wipe the slate clean and later qualify for a commercial loan are likely to make intrafamily lending even more popular, said John Mulligan, a real estate attorney in Minneapolis who frequently facilitates housing-related loans between relatives.
Get everything in writing
Everyone agrees that being indebted to Mom and Dad or Uncle Moneybags is a situation that can be fraught with conflict.
John Boyd, a finance professor at the University of Minnesota’s Carlson School of Management, says intrafamily lending can be as perilous as dating someone in the office.
He said the best way to avoid problems is to get everything in writing and carefully and thoughtfully discuss the situation with other family members who might have a vested interest. That includes consulting with your spouse, other children and even your financial planner to find out more about the implications.
Kris Wilson, a mortgage lender for Summit Mortgage in Bloomington, Minn., said such intrafamily loans were much more popular when interest rates were in the double digits but are “not uncommon” today, particularly with buyers who need help to make a down payment and to finance a second mortgage.
Wilson sold a south Minneapolis duplex to her stepdaughter several years ago – she financed the down payment and held a contract for deed for a couple of years while her stepdaughter finished nursing school.
Mitchell Weers, a Rosemont, Minn., homeowner, borrowed nearly $200,000 at 4 percent from his father-in-law.
“I have to pay it anyway,” he said. “Why not pay a family member so he can earn money on that?”
Weers searched the Internet for advice and found CircleLending, which was founded five years ago in Boston.
“We said, ‘OK, if we do this, we want to make it legal; we want him to have the same rights as a bank would over the property.”‘ Weers said.
Advani, who worked for the World Bank in Washington, D.C., and had seen lots of interfamily lending in developing countries where commercial lenders are difficult to come by, said those transactions were mostly word- of-mouth deals with unusually high default rates. In large part, that’s because the borrower and seller often failed to create structured payment arrangements that would keep the borrower disciplined.
Following repayment schedules caused the default rate to drop by half, he said.
“Once you fall behind, you fall into a hole that’s difficult to climb out of,” he said. “We impose a discipline that keeps people on track.”
Advani said that for $599 the company will create a promissory note and mortgage and record that mortgage with the appropriate governmental office. The company does all the payment processing, including direct deposit, an updated amortization schedule and annual tax statements.
A growing number of Advani’s clients are borrowers with adjustable- rate mortgages who see the potential for rates to rise and want to lock in a lower rate with a loan from a relative.
Lenders seeking safety
Lenders, too, are looking for safety in their investments.
“There is some skepticism about annuities,” Advani said. “People are searching for ways of earning 5 percent on their money, and they’re seeing intrafamily mortgages as a way to do that.”
Helena Semerjian of Lunenburg, Mass., said she felt that lending her daughter money to buy a $225,000 house was a better risk than stocks.
Semerjian said previous loans have gone unpaid, so she refused to make the loan without a rigid payment schedule and a legal agreement upfront. They worked with CircleLending to draft an agreement and set up a payment schedule.
Over the life of the loan, she expects to earn more $50,000 in interest.
“The stock market is getting me nervous,” she said. “So I said, ‘Let’s take over the mortgage and exploit our daughter.”‘
The Denver Post contributed to this report.
