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When Alison Boesel and her now-husband, Jon Risso, bought their Silver Spring, Md., home in 1999, they got a mortgage from a bank. When the couple refinanced in 2008, they turned to a more familiar institution: the Bank of Mom and Dad.
The Rissos are part of a trend of homebuyers getting a mortgage from family members ? usually parents ? when they purchase or refinance a home. Some families lend enough for the entire mortgage. Others provide second mortgages or home-equity loans.
These family loans can help solve two of today's thorniest finance problems: qualifying for a mortgage and searching for a higher return on conservative investments.
The Rissos refinanced when Alison's retired parents, Gail and David Boesel, liquidated their stock-market investments. The Boesels used the proceeds to purchase real-estate rentals and some of their children's mortgages. Their refinance dropped the Rissos'?interest rate to 3.5% from 5.875%.
The family used a lawyer to draw up 30-year, fixed-rate mortgages. The kids send their payments without reminders and pay their real-estate taxes and homeowner's insurance.
"Everyone wins," Alison Risso?says. "They get a higher interest rate, and we pay a lower one."
The Rissos also sidestepped thousands of dollars in refinance fees for points, escrow, the appraisal and other lender charges.
The arrangement also provides an unusual sense of security. When, on separate occasions, each of their daughters lost her job, the Boesels offered them the chance to pay only the interest temporarily. "We haven't had to take them up on that yet, but it's nice of them to offer," Alison Risso says.
Not for everyone
Intrafamily lending isn't for everyone. Lenders in these scenarios should carefully consider the effect on their finances, says Howard G. Safer, a certified public account who administers and advises family trusts as CEO of Argent Trust in Nashville, Tenn.?
Safer has been a borrower and lender in his own family. He and his brother got home loans from their parents.
"We were still paying up until my mother passed away five years ago," he says. Now, he and his wife are helping their children with home loans.
Safer advises against lending money you'll need for retirement, no matter how much you want to help a child or relative. His rule: "Take care of the senior generation first." A retired person living on $300,000 of savings and Social Security is not in a position to fund a child's mortgage, he says.
Ask yourself if you could absorb the loss if your borrower could not repay. Intrafamily lenders should remember that even responsible borrowers could lose their job or suffer other hardships that could cause them to default, says MSN Money personal-finance expert Liz Weston, author of "The 10 Commandments of Money: Survive and Thrive in the New Economy." If you use a contract, you'd have title to the home. But would you really foreclose?
"Just imagine foreclosing on your son or cousin and then having to face them at future family events," Weston says.
"Your everyday family, this probably isn't the solution for them," says Tim Burke, CEO of Boston-based National Family Mortgage. His company charges a one-time $599 fee to help families draw up contracts and register tax-deductible mortgage liens. Loan servicing, available for an additional $15 a month, includes monthly statements, electronic accounts, escrow, tax-reporting help and customer support. Burke says that about 80% of his clients are parents lending to adult children.
"If anyone expresses an iota of reservation, we really encourage them to not do this," he says.
Instead of lending, Safer says he may suggest an outright gift to help a child with a down payment or closing costs.
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MSN Real Estate
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