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Going to not be long winded here.... might not work.

Currently own a house. 1500sq ft. owe $130k Going to rent it out when I move.

Have an offer on a short sale house $200k.

My parents have recently retired.

My parents came to me and said they would buy my house and the house I have an offer on. I would then pay them like I would any other bank. So they would be getting 4.x% of interest on the money they give me (whatever the going rate is for a home loan).

When they told me I kinda just looked at them and said I would think about it.

Their resoning is that they get a safe return on the money. Also if something happend to them I would just be getting their money anyways so might as well get some return on it.

I just don't understand how it would work... would I be able to write off the interest I pay them like i would a bank?

Does this sound like a crazy thing to do? To me it would not bennifit me much as far as money saved.. but I would be giving my parents interest instead of just paying it into a bank. If something happend to them (god forbid) i would get whatever they have anyways.

Is this something that people do? I have not looked into it but wouldnt they be able to make more interest just buying bonds or something?

sorry if i sound kinda stupid.. I just wanted others advice or thoughts.

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Sounds like a better solution would be for them to buy this and put it into a trust with you as the beneficiary. Then, ... (more)

Dus10 (Dec. 25, 2010 @ 1:16p) |

My thought exactly.

dcwilbur (Dec. 26, 2010 @ 4:30p) |

Are the parents expecting the rent money on the second home as part of the return on this investment?

depalma13 (Dec. 28, 2010 @ 5:46a) |

Quick Summary is created and edited by users like you... Add FAQ's, Links and other Relevant Information by clicking the edit button in the lower right hand corner of this message.
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Another question you should ask....who is the title going to be under?

Bad news. The Banks and their government agents at the IRS already thought of this.

would I be able to write off the interest I pay them like i would a bank?Your parents would have to register as a financial institution with proper tax status in order to issue you proper papers to write off your interest payments.

Seawolf21 - I never got that far to find out. My guess would be that it would be in their name until I paid it off.

Axiom thanks-
If I can not write off the interst then I will not be doing it.

TJ2002 said:   My parents came to me and said they would buy my house and the house I have an offer on. I would then pay them like I would any other bank. So they would be getting 4.x% of interest on the money they give me (whatever the going rate is for a home loan). So are they going to buy the houses, or just hold the mortgage on the houses you own? If they buy the houses (and thus own them) while you pay them a monthly amount, its called "rent" not a loan.

There's nothing wrong with using private financing; there are risks when lending money amoungst family members - even when you all get along great and couldnt imagine there ever being a problem.

If the parents claim the interest earnings as income, you'll be able to deduct the payments as an expense. But they'll need to send you a 1099 for each year.

Using some really lose math, $330k at 4.0% for 30 years is roughly $2973 a month. Can you pay this reliably without rental income? is this less than 40% of your total income? If you answered no, don't do it.

TJ2002 said: Also if something happened to them I would just be getting their money anywaysAre you an only child? What about probate and estate taxes?

TJ2002 said:   Seawolf21 - I never got that far to find out. My guess would be that it would be in their name until I paid it off.

Axiom thanks-
If I can not write off the interst then I will not be doing it.


See if they'll give you a break on the interest to make up for the lost deduction. If you can get a 2.5-3% rate, then you're still getting a good rate net of deduction and they're still getting a killer savings rate.

TJ2002 said: but I would be giving my parents interest instead of just paying it into a bankI dont think there is any easy and legal way for you to write off this interest

soundtechie said:   Using some really lose math, $330k at 4.0% for 30 years is roughly $2973 a month. Can you pay this reliably without rental income? is this less than 40% of your total income? If you answered no, don't do it.
May want to make that less "lose" next time. The payment is more like $1575.

TJ2002 said:   My parents came to me and said they would buy my house and the house I have an offer on. I would then pay them like I would any other bank. So they would be getting 4.x% of interest on the money they give me (whatever the going rate is for a home loan).
I don't get the part about parents *buying* the house. As pointed out earlier, that would make you a tenant and what you pay is rent. This is not same as what you would do with a bank since the bank is not buying the property, nor is the bank on the title. The house is simply a collateral for the loan.

uutxs said:   soundtechie said:   Using some really lose math, $330k at 4.0% for 30 years is roughly $2973 a month. Can you pay this reliably without rental income? is this less than 40% of your total income? If you answered no, don't do it.
May want to make that less "lose" next time. The payment is more like $1575.



That's what I get for using "lose" math. I thought it sounded steep. Anyway, the question remains: can you pay $1575 a month? is it less than 40% of your income?

soundtechie said:   uutxs said:   soundtechie said:   Using some really lose math, $330k at 4.0% for 30 years is roughly $2973 a month. Can you pay this reliably without rental income? is this less than 40% of your total income? If you answered no, don't do it.
May want to make that less "lose" next time. The payment is more like $1575.



That's what I get for using "lose" math. I thought it sounded steep. Anyway, the question remains: can you pay $1575 a month? is it less than 40% of your income?
I don't think that's really applicable for this thread -- OP has not mentioned any kind of burden or question on making payments, just how he should be financing.

soundtechie said:   uutxs said:   soundtechie said:   Using some really lose math, $330k at 4.0% for 30 years is roughly $2973 a month. Can you pay this reliably without rental income? is this less than 40% of your total income? If you answered no, don't do it.
May want to make that less "lose" next time. The payment is more like $1575.



That's what I get for using "lose" math. I thought it sounded steep. Anyway, the question remains: can you pay $1575 a month? is it less than 40% of your income?


well under 40% of my household income. I am pretty frugal when it comes to spending. even your lose math is under the 40%.

Glitch99 said:   TJ2002 said:    So are they going to buy the houses, or just hold the mortgage on the houses you own? If they buy the houses (and thus own them) while you pay them a monthly amount, its called "rent" not a loan.

There's nothing wrong with using private financing; there are risks when lending money amoungst family members - even when you all get along great and couldnt imagine there ever being a problem.

If the parents claim the interest earnings as income, you'll be able to deduct the payments as an expense. But they'll need to send you a 1099 for each year.



To me it sounded like they would buy it hold the title and i would pay them back.. So it would just be like rent.. and deffinatly not what I want to do.

I also agree that getting into money with family is risky. I have had problems with other family members that I have loaned money to... to never see it again.

uutxs said:   TJ2002 said:   
I don't get the part about parents *buying* the house. As pointed out earlier, that would make you a tenant and what you pay is rent. This is not same as what you would do with a bank since the bank is not buying the property, nor is the bank on the title. The house is simply a collateral for the loan.


You are 100% right and I would need to ask them how the title would be. I think it sounded more like they would hold the title. So it would be like renting. and I don't want that.

I will check with them on what they meant.

wpgabriel said:   TJ2002 said:   Seawolf21 - I never got that far to find out. My guess would be that it would be in their name until I paid it off.

Axiom thanks-
If I can not write off the interst then I will not be doing it.


See if they'll give you a break on the interest to make up for the lost deduction. If you can get a 2.5-3% rate, then you're still getting a good rate net of deduction and they're still getting a killer savings rate.



I am going to find out more information.... and run it by the wife. I love saving money and I like it if they get a good return on their money. It would be win win. I just don't want family problems. and don't want it to cost me more money.

Alcibiades said:   TJ2002 said: Also if something happened to them I would just be getting their money anywaysAre you an only child? What about probate and estate taxes?


I am not the only child 1 sister. And I know nothing about probate and estate taxes. I don't think about anything happening to them so never thought about what I would get. Only reason it came up here is with them having the title to the house.. if that was there plan.

I think the more I think about it the easier it would be just to get a bank loan .

I pitched this same idea to my parents who are still paying off their house. I said why give hundreds of dollars a month in interest to a bank when you can give it to family. They said no, were too scared. I wish my parents were more like yours.

You might come out ahead on your taxes because with the bank loan paid off, you might be able to take the Standard Deduction on your taxes AND get the mortgage deduction benefit from your parents.

As mentioned earlier, you can get the mortgage deduction benefit by asking your parents to lower the interest rate by an amount equal to the break you would have got from the deduction. The deal will probably still be attractive to your parents.

There are many amortization calculators on the Internet. Plug in the numbers and print out an amortization schedule so that you have the payment plan all schedule ahead of time.

[Edited: I re-read your original post and see that this would be a 2nd home so the tip about the standard deduction does not apply.]

You may be able to work something out that is financially beneficial for you and your parents. However, if you do that, treat it as a business deal between you and them. Get everything written down. You can probably find private lending forms online or have them drafted up from a law firm. Make it all above board. If you can deduct the interest, then they can charge a rate similar to what you would get from a bank. If not, they can charge a little less (but will still have to declare the income). You might be able to get other favorable terms (closing costs should be significantly less, you can negotiate something like one fee-free late payment per year, etc.) that a bank would never offer but that family might not have any problems with. Just make sure that everyone knows it is a business decision (for example, make sure that your parents are ready to foreclose on you if you stop making payments, and will be okay if you choose to refinance at some point).

If they want to do this below board, respectfully decline. Let them know that your relationship is too important to have the kind of strain that come come if any part of a very large financial deal goes bad.

And definitely only do it if they will be your financing (and you hold the title).

axiom said:   Bad news. The Banks and their government agents at the IRS already thought of this.

would I be able to write off the interest I pay them like i would a bank?Your parents would have to register as a financial institution with proper tax status in order to issue you proper papers to write off your interest payments.


Are you saying that interest cannot be deducted on Schedule A without a 1098?
If yes, Please cite your source.
I know it could be deducted in 2009, my software (Drake) even has a place to input non-1098 interest with name and SSN of payee. (obviously, the payee better have the interest on his schedule B)

axiom said:   Bad news. The Banks and their government agents at the IRS already thought of this.

would I be able to write off the interest I pay them like i would a bank?Your parents would have to register as a financial institution with proper tax status in order to issue you proper papers to write off your interest payments.
NEWSFLASH - You don't have to be a bank in order to lend someone money. As long as the loan qualifies as a secured mortgage on your home according the IRS guidelines, the interest would be deductible, regardless of who was lending the money.

IRS Publication 936

No offense intended, but your parents are pretty silly to put $400K into an investment paying a measly 3-4%. What's in it for them?

The most productive thing economically for your family would be to take your parents cashmoney and put it into a higher performing asset with a risk level they are willing to accept and borrow from the banks while their money is practically free. Leverage yourself as much as you can.

If your parents were willing to float me money eventually, I would go out and grab an interest only or low rate ARM at 2.75-3.25% and get the property and keep the money in a low risk dividend stock or bond. Some that will preserve capital. Then after 5 years or earlier refinance depending on what the housing market is doing or just pay the house off outright.

Don't do it! Should one or both of your parents pass away or go into a nursing home and despiratly need money (say nursing home)in the years before you pay off the morgage you will have ill will with your sister and her family and that is not the legacy your parents will want. What happens if they both die and your sister needs money? Mixing large amounts of money and family is risky not just fiscal risk but emotional risk. I would not touch this deal with a 1 million foot pole.

400k in a 3-4% investment? How did they become so wealthy, especially able to retire without knowing anything about investments? 400k could easily be done at 30% if you take a high risk yield. Which they could, cause it does not sound like they are hurting for money.

jstutman said:   400k in a 3-4% investment? How did they become so wealthy, especially able to retire without knowing anything about investments? 400k could easily be done at 30% if you take a high risk yield. Which they could, cause it does not sound like they are hurting for money.

they shorted lehman, citibank, BOA, Bear Stearns, Wamu.

good old days.

tyrone3971 - No offence taken. I don't know what is in it for them. I really did not talk to them much about it. They mentioned it and the entire idea sounded a little scary to me (like lindylady said) so did not question it much. Figured I would do some research and thinking about it before talking to them more about it.

jstutmat - I do not think I said they know nothing about investing. I don't know their angle or what they expect to get from it. Maybe they just hate interest going to banks who get bail outs. maybe they figure by me paing interst to them I get more money later in life. I know very little about their finanical situation. I guess they know enough to have the cash to offer up and not be to worried about it.

My suggestion: have your parents purchase/pay off the house you plan on renting & then come to an arrangement to share in the rental proceeds & maintenance/upkeep for it. This way it's purely business. Buy the $200,000 house on your own separately which would allow you to have the interest deduction (for as long as that lasts).

TJ2002 said:   I don't know what is in it for them. I know very little about their finanical situation. I guess they know enough to have the cash to offer up and not be to worried about it.Maybe they have their money in a regular bank savings account earning 0.15% or a short term CD earning 1% or 2% and they see would love to make 3% - 4%. You can lower the interest rate to make up for the mortgage deduction and they would still have a nice comparative return.

TJ, Honestly if you do this deal it's a very good deal for both of you.
They should replace a bank in what would otherwise be a normal transaction MEANING:

1) You buy the home.
2) You hold title.
3) They lend you money and create a mortgage note on your property. You need a drafted mortgage note, that is their security instrument.
4) Charge you a cheaper nominal interest rate than the bank would give you.
5) If it is tax deductible then their rate should be better than the bank rate by .25%-.5% (incentive for you to borrow from them).
6) If it's not tax deductible then their rate should be .25%-.5% better than the AFTER TAX mortgage rate (so lets say 3% for a 30 yr fixed).
7) You save a hell of a lot in points/closing costs/appraisal fees etc.
8) If something were to happen to them, they only hold the mortgage note which collects only the monthly payment from you. Nothing more.
9) You can write that note to have very favorable terms for you (no late fee, no foreclosure, arbitration, blah blah blah, etc.)


Basically this transaction should occur like any other normal transaction with a bank except with your parents minus a lot of fees and lower interest. It's definitely a win-win for both of you. You need to be in charge, and you need to know all the details. I would say it is definitely worth the effort.

See the half-dozen other threads on private mortgages to/from family friends. Done like a normal arms-length transaction at market rates, it's not a super good deal for them (credit risk, lack of diversification.) But if they were going to give you a gift by financing it at attractive terms, in that context it's not a bad deal.

I had that offer extended to my by my inlaws. I declined it for a few reasons; one I just learned doesn't apply.

I thought I would lose the Schedule A mortage deduction, which DCWILBUR pointed out that I could still deduct.
They were more in it for themselves than to help our their daughter and me. They had the money parked in a CD that was coming due, and the renewal interest rates were going to be much lower, so they were hoping to get more ROI. I would get a small interest rate reduction.
If my family ever got wind of it, I would never hear the end of it, as my family thinks MIL is selfish and [insert expletives here].
Money and family don't mix, and I had my pride to uphold.

Maybe this is what someone told your parents about or they camemacross: Bankrate: Bank of Mom and Dad

Basically, above a certain interest rate, it's not a "gift". Thus, you get a loan, they get cash, and the money stays in the family. Offers a way not to lose the wealth between the family and provide them a greater return than savings and safer that stocks (assuming they can trust you). However, you do need to be careful of the "familial relationship" aspect of the equation so a drift between you, them, and other family members doesn't happen.

My mom and I did that on my starter home years ago. She got 4% back and the money stayed in the family. The loan amount was low enough that my standard deduction covered it and on her end, the "interest" was low enough to use the annual gift exclusion. It was a nice setup.

As I'm about to buy another house, she offered again, but I turned it down this time as I can get a super low rate roan with minimal costs and she is in a multiple-year CD higher than the loan rate.

I'm doing this. Borrowed about ~$150k from relatives, and paying them 4.5%. Saved me money, and gives them a great rate of return.

mapen said:   TJ2002 said:   I don't know what is in it for them. I know very little about their finanical situation. I guess they know enough to have the cash to offer up and not be to worried about it.Maybe they have their money in a regular bank savings account earning 0.15% or a short term CD earning 1% or 2% and they see would love to make 3% - 4%. You can lower the interest rate to make up for the mortgage deduction and they would still have a nice comparative return.
It would be stupid for the parent to tie up their money for the next 30 years @ such a low rate.

hirenrp said:   TJ, Honestly if you do this deal it's a very good deal for both of you.
They should replace a bank in what would otherwise be a normal transaction MEANING:

1) You buy the home.
2) You hold title.
3) They lend you money and create a mortgage note on your property. You need a drafted mortgage note, that is their security instrument.
4) Charge you a cheaper nominal interest rate than the bank would give you.
5) If it is tax deductible then their rate should be better than the bank rate by .25%-.5% (incentive for you to borrow from them).
6) If it's not tax deductible then their rate should be .25%-.5% better than the AFTER TAX mortgage rate (so lets say 3% for a 30 yr fixed).
7) You save a hell of a lot in points/closing costs/appraisal fees etc.
8) If something were to happen to them, they only hold the mortgage note which collects only the monthly payment from you. Nothing more.
9) You can write that note to have very favorable terms for you (no late fee, no foreclosure, arbitration, blah blah blah, etc.)


Basically this transaction should occur like any other normal transaction with a bank except with your parents minus a lot of fees and lower interest. It's definitely a win-win for both of you. You need to be in charge, and you need to know all the details. I would say it is definitely worth the effort.

All these suggestions are good for the OP; but bad for the parent. 10-yr Treasury Bond is now yielding over 3% -- guaranteed and no state income tax.

The other terms should be no more favorable than what the OP can get from a 3rd party. You are telling OP how to squeeze his parent.

With respect to the house that OP has an offer on, it might be possible for the father to buy it from the bank at a lower price for ALL CASH. The he can re-sell it to OP @ $200K and take back a mortgage at the prevailing interest rate & terms. The OP would be no worse off -- since he would be paying the same price as if he buys it from the bank -- since that is his current offer.

I have no issue doing such a transaction with my parents. There are probably better ways to do it (a few suggestions above).

Also, if you make such a deal, make sure it is in your best interest. My parent's wanted me to buy their home or rent it. They want more than I would be willing to pay. I told them it was in their best interest to get as much as possible for it, if it is more than I am willing to pay. It is in my best interest to get something I am willing to pay for. I would actually be ok with the price if there wasn't $400-$500/mo to 3 HOA's.

OP, I think your parents are looking for a way to "gift" you. It seems that they are not originally from this country. If you really love them, do your dd and take the offer. Otherwise you are really hurting them.

The interest you pay to them is 100% tax deductible (if you itemize). They should write you 1098 every year if the amount is >$600. You also should have a formal settlement to close the "loan" - closing cost should be less than $1000 (again do your d.d.) - origination charge, appraisal, lender fees should all non-exist.

Just throwing this out as an option for creative accounting. The IRS requires that you pay at least AFR (Applicable Federal Rate, which is updated monthly) on familial loans - current short-term (up to 3 years) is 0.32%, current mid-term (3-9 years) is 1.53%, and current long-term (>9 years) is 3.53%. Any amount that is payed as interest on a real estate loan (reference Pub. 936 above) is taxable to your parents and tax-deductible for you.

With those ground rules, there is a nice loophole there using AFR, gifts, and demand loans. What you have the possibility of doing is paying your parents 0.32% taxable interest (by writing a demand loan agreement - the loan is due on demand instead of a fixed date - demand loans are by definition short-term rates), and then paying them an annual gift to a reasonable rate (whatever you and your parents decide). In this case, you don't have to worry about your parents calling the loan early, and they know they'll get a nice check under the christmas/hanukkah/kwanzaa/etc tree each year. The biggest advantage is if your parents are in a higher tax bracket than you. The income costs them a lot more at their higher rate, so it's better for them to get as little interest as possible, which in this case they get $320 a year per $100k loan. On the other hand, if your tax rate is higher (say parents who are retired with minimal income), then it makes most sense to make all the interest taxable. You get a bigger tax break while the parents don't have to pay very much tax on the interest. This means that you can structure the loan such that it is beneficial to both parties (as per hirenrp's post), as you both know your tax situations. The bank neither knows nor cares what your tax situation is when they specify an interest rate.

The biggest question is whether your parents are out for their best interest or your best interest. If they are trying to help you out and just want a reasonable rate (2.5-3% after tax), then it can be very good for you; if they want you to beat their 30-year bonds at 4.25%, then you're better off going to a bank. Only you can answer the problems of family+money; many times it works and many times it doesn't.

Skipping 28 Messages...
Are the parents expecting the rent money on the second home as part of the return on this investment?



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