Would you do this?

[DrVos]

So I was telling my mom today how I've been looking to refinance my 30 year mortgage from 6.375% to something in the 5.5% range (if it drops back down that low) when she brought up an interesting idea. Her thought was that she could pay off the principal I owe, and she would give me a personal loan at 5%. She would have an attorney draw up an agreement and provide the amortization schedule and everything.

Her reasoning would be that I'd save money on the interest and closing costs, and she would be able to help me out while making more than if she would putting her money into a CD. I figure I'd save a little over $200/month at 5%.

My two concerns so far:
How would this affect my tax liability? Would not having a "mortgage" cancel out the money I'd save?
Would it be weird that I'd be essentially paying rent to my parents for my house? My name would be on the deed, but it would have been paid off with their money. I was thinking that it it'd be no different than the situation I have now, where the bank essentially owns my house, but it still feels weird.

I've borrowed large sums of money from my parents before and we've never had a problem.

Thoughts?

 

[radioouman]

Can you write off the interest paid to your parents on your taxes without real tax documents?

 

[FoBoT]

plenty of mortgages are privately held, it still counts as far as i know (the interest is still deductible even though a relative holds the note)

 

[Drako]

You're getting screwed out of your mortgage interest deduction if you go that way. You will end up losing money in the long run.

 

[spidey07]

I see this as nothing more than your parents making money off of you. Plus mixing family and money like that just screams bad idea, so many things can go wrong and the tax implications could get tricky or seriously illegal if not followed properly.

 

[IceBergSLiM]

Originally posted by: Drako
You're getting screwed out of your mortgage interest deduction if you go that way. You will end up losing money in the long run.

why? I'm sure an account can give him reciepts for his loan payments.

 

[GrantMeThePower]

There shouldn't be a problem. Its a good idea.

 

[Epic Fail]

Originally posted by: spidey07
I see this as nothing more than your parents making money off of you. Plus mixing family and money like that just screams bad idea, so many things can go wrong and the tax implications could get tricky or seriously illegal if not followed properly.

What's wrong with letting the parents make some money when you are saving? I do agree with the other points.

 

[Tobolo]

Go watch Judge Mathis.

 

[Bryophyte]

Never, ever let a family member get you by the balls like that.

 

[Fritzo]

Hell no. No matter how well intentioned they are, nothing will tear a family apart more than lending money. Don't do it.

 

[waggy]

Originally posted by: Bryophyte
Never, ever let a family member get you by the balls like that.

i agree. i sure in the hell wouldnt do that.



but i don't see how he wouldnt be able to claim interest. he would have reciepts and a contract.

 

[DrVos]

Originally posted by: yamadakun

Originally posted by: spidey07
I see this as nothing more than your parents making money off of you. Plus mixing family and money like that just screams bad idea, so many things can go wrong and the tax implications could get tricky or seriously illegal if not followed properly.

What's wrong with letting the parents make some money when you are saving? I do agree with the other points.

If it was as simple as choosing to pay a bank $235,000 in interest or my parents $200,000 in interest, the decision would be easy. I guess it all hinges on if I'd qualify for the home interest deduction and any possible legal entanglements.

Some quick calculating indicates that if I weren't able to deduct the interest, I'd lose an average tax credit of about $2,500 a year over the life of the loan. That would effectively cancel out any savings I'd gain with a lower interest rate through my parents.

 

[Bryophyte]

Would the IRS want to get involved with it? Might they try to tax you on the money your mom would give you?

 

[waggy]

Originally posted by: Bryophyte
Would the IRS want to get involved with it? Might they try to tax you on the money your mom would give you?

do you get taxed when you get a loan on a house from a bank? or a personal loan?


why would this be diffrent?

 

[FoBoT]

if you have a lawyer do the paperwork , you should be fine, read Pub. 936
as long as your parents don't buy the house , you are ok
read the section on "Secured Debt" , they have to give you a mortgage, not buy the house themselves and make you 'pay them back'

you should post the question in the tax thread for the tax gurus to answer, they'll know right off if there are any catches

 

[puffff]

Originally posted by: Bryophyte
Would the IRS want to get involved with it? Might they try to tax you on the money your mom would give you?

I don't see how the IRS would get a chunk. If you got that $200,000 from a bank, the IRS doesn't take a chunk. This is the exact same thing, except the counterparty is an individual instead of an institution.

Assuming your family is mature enough to handle it, I think it's a great idea. win win for both sides.

 

[DrVos]

I found this link: http://www.smsmallbiz.com/Seve...ey_to_Your_Family.html

It provides some helpful guidelines for loaning money to family. It seems to state that as long as my mom secures the note with the residence and documents the loan, I'll be able to to get the tax deduction.

Bryophyte: From that same link, as long as it's documented properly, the IRS won't view it as a gift and she won't be taxed as such. She will have to pay taxes on whatever interest she earns from the loan though.

 

[novasatori]

sounds like a good deal

as long as you aren't having problems making payments, who cares if its family or not, I'd take a family member up on any similar deals they offered me as long as I could pay

 

[DrVos]

Originally posted by: FoBoT
if you have a lawyer do the paperwork , you should be fine, read Pub. 936
as long as your parents don't buy the house , you are ok
read the section on "Secured Debt" , they have to give you a mortgage, not buy the house themselves and make you 'pay them back'

you should post the question in the tax thread for the tax gurus to answer, they'll know right off if there are any catches

Thanks for the information! We'll need to do our homework to make sure this can work for us.

 

[Skeeedunt]

No.

 

[rivan]

Originally posted by: Fritzo
Hell no. No matter how well intentioned they are, nothing will tear a family apart more than lending money. Don't do it.

:thumbsup:

 

[bctbct]

eh, you'll be back to your mom telling you to go make your bed :laugh:

 

[Captante]

Originally posted by: Fritzo
Hell no. No matter how well intentioned they are, nothing will tear a family apart more than lending money. Don't do it.

This is good advice .... no matter how much money you save/they make, the potential downside is destroying your (I assume) close relationshop with your family which is somthing you won't be able to replace.

 

[maziwanka]

Originally posted by: waggy

Originally posted by: Bryophyte
Never, ever let a family member get you by the balls like that.

i agree. i sure in the hell wouldnt do that.



but i don't see how he wouldnt be able to claim interest. he would have reciepts and a contract.

i could see this being a good general rule to follow, but let's hope that there are some parents out there that you can trust. hahaha.

if the details worked out in both our favors (especially since i dont know if you can writeoff the mortgage interest on your taxes in this situation), i wouldn't hesitate to enter into a similar contract with my parents. i love em. hahaha