Q: My brother-in-law is going to re-finance his home at a lower interest rate and we are considering on carrying the loan.
The loan would be $150,000 for 30 years at 4 percent. The payback for the $150,000 would be in 17.5 years.
I am 66 years old and my wife is 63. We are estimating a life span of 86 years which will be 20 more years for me. If that is the case there would be 10 years left on the balance of the loan that I would never see.
We believe that 20 years would be a much better term length for us but believe my brother-in-law wants the 30 year loan. If we decide to carry the loan would it have any negative impact on our credit? It would be a non-issue as far as our budget goes.
We are not sure what we should do. Any advice or suggestions would be appreciated.
A: You’ve asked several good questions. Let me see if I can answer them.
First, your investment in your brother’s mortgage is akin to you being the bank. Investments are generally never listed on a credit history (have you pulled yours lately?). You can invest the cash you have any way you want.
As far as the loan term, you need to decide what you’re willing to give him and what is best for you. Given current interest rates, you may prefer to give your brother-in-law the money and receive 4 percent back in interest. The choice to invest your money in the stock market or by becoming his lender is yours. But you must make sure you are comfortable with your choice. If you invest in the stock market or put your money in a CD at a bank, you have some control over when and how to get your money back.
When you become a lender on a residential piece of property, you may have to hold on to that loan for the full term. If a 30-year loan term does not appeal to you, you might want to give him a loan for a shorter term. If you decide to go forward on a 30-year mortgage, but could also decide that you might want a higher rate of interest at 10-year or 15-year intervals.
The real issue for you is to be comfortable with the structure of the deal.
If you are doing your brother-in-law a favor in giving him this loan, he may be saving money by obtaining a loan from you. Generally, lenders charge fees to give a loan to a borrower. In exchange for the savings your brother-in-law may benefit from, you may wish to obtain a slightly higher interest rate on the loan.
Given your age, you must make the financial decision for yourself. While you are figuring that you will live until age 86, you might well live to be 96 or 106, and having that extra income might come in handy.
But there are some other questions you must ask before you become a lender in a residential transaction.
First, what happens if your brother-in-law doesn’t live another 30 years? How will the loan be paid off? Will the property be sold or will he buy an insurance policy to cover the amount of the mortgage? What if he goes into bankruptcy? What happens if he decides to sell the house and it is worth less than the mortgage amount? Will you foreclose on the house? Will you sue him for the difference? What will happen if you and he no longer get along? And, will you require that he escrow the property taxes and insurance so you know the home always has insurance and property taxes will be paid? How will you check on these items?
You are operating from a position of strength. If your brother-in-law is unwilling to do a 20-year amortization schedule that suits your needs, then you might suggest that he find another lender willing to give him the loan he needs.
Finally, all this needs to be in writing, and then the loan documents must be recorded in the local recorder of deeds office or other office that is used in your area to record documents so that the world is on notice that you have a lien against the property. If you don’t record the mortgage, your brother-in-law could easily go and get another loan on the property or sell the home without paying you off, and you’d be left with nothing.
You and your brother-in-law might be close now, but if he stops making payments, this whole scenario won’t have such a rosy ending. You need to sit down with your brother-in-law and have a discussion about what suits your needs and what you are comfortable doing.
You better understand exactly what you’re getting into with this loan. To that end, consider pulling a copy of his credit history and score from each of the three credit reporting bureaus to get a sense of where your brother-in-law is financially and to confirm any information he has given you. I’m not suggesting you shouldn’t give him a loan if he has a terrible credit score. It’s just that you want to go into this with your eyes wide open.
In short, your own credit history and score shouldn’t be affected. But hire a good real estate attorney to draw up the documents and make sure all the “ts” are crossed.
Thanks for writing.