First world problem alert, advice on large loan from family

[Anonymous]

We are very fortunate and are getting a large loan from family to buy a home in cash. (Home is $2.7m, we are contributing 700k, loan is for $2m) We have two choices to pay them back - a 40 year payment plan with a smaller monthly payment or a thirty year payment plan with a slightly larger payment. Both have an interest rate of 3.5%. Which option would you choose? The smaller monthly payment is attractive but it does mean more interest over the course of the loan. We are a dual employed couple with stable jobs and very good income (700k in salary a year but high taxes), two small kids in public school, college costs fully covered, and retirement on track. This "problem" sounds obnoxious and I am sorry, but advice is welcome.

[Anonymous]

Can you pre-pay the loan?

[Anonymous]

We have no idea what your day to day finances are like, OP. What monthly payment makes sense to you? Is your income likely to stay at a similar level? Is there room for growth?

[Anonymous]

I've got to say, the juxtaposition of this thread, with the one about the DIL who is so angry that her husband wants to give his mother $4k to pay off a loan, is really striking.

[Anonymous]

Anonymous wrote:Can you pre-pay the loan?

Yeah, what’s the answer to this question, OP?

If you can prepay it and the interest rates are the same there’s no downside to taking the 40 year option to lock in that $7,750 payment instead of $9,000. You can always choose to pay more and pay it off early.

[Anonymous]

What happens in the event that the lender dies over the next 30/40 years? Will you owe the estate a balloon payment or will the loan be forgiven/subtracted from inheritance?

FWIW we had a family loan (not so large) and complications with our title when we sold because of the estate (even though the loan was repaid). We had to get multiple heirs to sign a legal document to remove their claim.

[Anonymous]

It doesn't make any difference. Since the interest is the same, I'd take the 40 year. But really there is no significant difference. Maybe if rates drop low again, you'd be be paying a higher rate than people who can refinance. For instance my rate is 2.25%.

[Anonymous]

Anonymous wrote:It doesn't make any difference. Since the interest is the same, I'd take the 40 year. But really there is no significant difference. Maybe if rates drop low again, you'd be be paying a higher rate than people who can refinance. For instance my rate is 2.25%.

Man, I feel good about our 2.75%. Did you pay some points to get that low or just time it perfectly?

[Anonymous]

OP here. It is all kind of informal - we are basically borrowing from a pot of money designated for future inheritance and working with siblings (one member of older generation is still around but not interested in dealing with money matters). I guessing if rates drop the family members would allow us to "refinance". The other siblings have or have been offered similar deals to buy homes so it is a bit of an honor system.

As far as pre-payment, would we be allowed to or could we afford to? I am sure if we wanted to write a big check towards the loan every so often no one would stop us.

[Anonymous]

Anonymous wrote:OP here. It is all kind of informal - we are basically borrowing from a pot of money designated for future inheritance and working with siblings (one member of older generation is still around but not interested in dealing with money matters). I guessing if rates drop the family members would allow us to "refinance". The other siblings have or have been offered similar deals to buy homes so it is a bit of an honor system.

As far as pre-payment, would we be allowed to or could we afford to? I am sure if we wanted to write a big check towards the loan every so often no one would stop us.

This sounds like a disaster. Is this honor system really going to hold together for 40 years?

[Anonymous]

Anonymous wrote:

Anonymous wrote:OP here. It is all kind of informal - we are basically borrowing from a pot of money designated for future inheritance and working with siblings (one member of older generation is still around but not interested in dealing with money matters). I guessing if rates drop the family members would allow us to "refinance". The other siblings have or have been offered similar deals to buy homes so it is a bit of an honor system.

As far as pre-payment, would we be allowed to or could we afford to? I am sure if we wanted to write a big check towards the loan every so often no one would stop us.

This sounds like a disaster. Is this honor system really going to hold together for 40 years?

I guess no way to know but I hope so? Siblings wanted to give us the money flat out with no interest involved, money manager guy had to step in and say that we had to have interest for tax reasons. Sibs also have taken loans from the pot of money.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:OP here. It is all kind of informal - we are basically borrowing from a pot of money designated for future inheritance and working with siblings (one member of older generation is still around but not interested in dealing with money matters). I guessing if rates drop the family members would allow us to "refinance". The other siblings have or have been offered similar deals to buy homes so it is a bit of an honor system.

As far as pre-payment, would we be allowed to or could we afford to? I am sure if we wanted to write a big check towards the loan every so often no one would stop us.

This sounds like a disaster. Is this honor system really going to hold together for 40 years?

I guess no way to know but I hope so? Siblings wanted to give us the money flat out with no interest involved, money manager guy had to step in and say that we had to have interest for tax reasons. Sibs also have taken loans from the pot of money.

So in that case, and I'm not an attorney or estate expert, the IRS has minimum interest rates you must charge for family loans like this.

https://www.irs.gov/businesses/small-businesses-self-employed/section-7520-interest-rates

For May 2023 that rate is 4.20%

I have some experience with family loans like this and the situation in which we "charge" a minimum interest rate is to avoid the gift counting towards your lifetime gift tax exemption. And I put charge in quotes because we don't actually pay the interest, the debt is instead written down by $60k year (or whatever the maximum annual gift is between one couple and another), less the minimum interest charge. But if your money is in a trust or the total estate is less than $22 million or so then you don't have to mess with this.

Anyway, if you're charging interest for tax reasons you need to have an agreement in writing. You may trust your siblings, etc but the IRS is going to want something written down - even if it's just a simple letter outlining terms.

[Anonymous]

I would just do 30 year to eventually get it over with.

We bought our house for $615K 10 years ago and my husband is making us accelerate it to pay it off in 15 years.

I'm sure you'll eventually want to be out of the mortgage sooner than later - you'll have kids going to college, etc.

Our actual mortgage rate is the same as your family loan, but I get that interest rates are higher now. If I had to spread it out over 40 years, I personally would not buy the house.

[Anonymous]

You, a very rich person, are asking for advice on how to squeeze a few extra nickels out of your relatives, very richer people, who gave you a below market mortgage?

JFC

[Anonymous]

Anonymous wrote:You, a very rich person, are asking for advice on how to squeeze a few extra nickels out of your relatives, very richer people, who gave you a below market mortgage?

JFC

Is that what you got from OP's post? lol some people's children I swear