Should I give my boyfriend a mortgage?
Ask Brian is a weekly column by real estate expert Brian Kline. If you have questions about real estate investing, DIY, buying/selling a home, or other housing questions, please email your questions to [email protected].
Question from Grace in Virginia: Hi Brian, I’m divorced twice 72 years old, and does not plan to remarry. However, I have been in a relationship for almost 10 years with a retiree close to my age. All other things being equal, we are in two quite different situations financially. I own my home and have a healthy retirement bank balance of over $750,000. James has a house, but he’s not in a good financial position. He has a $145,000 lump sum payment due on his house in a few months. Here is my predicament, his lender won’t renew the loan and James wants me to lend him the money for the lump sum payment. He will pledge his house. He offers me 6% interest, but I averaged just over 11% with my managed financial account. Another serious problem is that he cannot get the loan renewed from his current lender because he has filed preliminary bankruptcy papers. And it gets worse. He wants the loan from me to be for 10 years instead of the 5 year balloon loan which is now due. James says it will cut his monthly payment almost in half so he’s better off financially and better able to make the monthly payments. I’m not financially sophisticated, but it doesn’t make sense to me that this is something I want to do. What do you think?
To respond: Hello Grace. I’ve been divorced twice myself and one lesson I’ve learned is that it’s a bad idea to mix romance and finances. First of all, because you’ve been in a relationship with James for 10 years, I hope the relationship is strong enough to survive when you say “NO” to James. With two divorces, I’m the last person to give relationship advice, but there are a ton of financial reasons why you don’t want to take this loan. Number 1 is the bankruptcy paperwork. Bankruptcy is conducted in federal court, but the bankruptcy code allows states to create their own rules regarding what assets residents can protect from creditors. A quick look at Virginia bankruptcy law makes it appear that the homestead exemption for people over 65 is $35,000 if there are no dependents. . I am not a lawyer and I do not give legal advice. Grace, if for any reason you are considering taking the loan, be sure to consult with a bankruptcy attorney about the security of James’ home as security for your loan. Personally, I would speak with a bankruptcy attorney who does not represent James. In my mind, that alone makes it clear why you don’t want to mix romance and finances.
The second reason you should say no is that you are 72 years old and in good financial health. I don’t know what the eventual loss of $145,000 will do to your lifestyle, but it won’t improve it unless it’s an amount you’re willing to pay for a romance that will most likely become strained by the finance. IMHO, James emphasized the relationship just by asking you for a big loan.
And there’s the 6% interest rate. No one can guarantee that your money will continue to return 11% in the future, but it has a solid history of earning well over 6%. Financially, it makes no sense to intentionally reduce the amount of interest your money earns. And he wants to extend the repayment period to 10 years. You will both be around 82 years old if the loan is repaid. I don’t mean to be ugly, but what if James dies before the loan is paid off? Do you want the hassle of owning another home or jumping through the hoops of selling it to get your money back at age 80?
Grace, these are just the most obvious reasons why you don’t want to be James’ banker. If it helps, print this article and give it to James. Tell him I don’t think there’s a single good reason why you should lend him money. If you lend him money, do so with an attitude you may never see again.
Please leave a comment if you have a better idea of what Grace should do.
Our weekly Ask Brian column welcomes questions from readers of all levels of experience with residential real estate. Please email your questions or requests to [email protected].