Smart retirement investing: Intra-family mortgages offer a high-yield alternative

All across America, retirees are investing their savings in Certificates of Deposit (CDs) paying 2 to 3 percent in annual interest. Banks in turn lend those savings out to borrowers at higher rates—from 5 to 6 percent for a mortgage loan, for example—and pocket the difference.

Jane Driscoll of Dedham, Mass., and her daughter Margaret found a way to keep that difference for themselves. Like many who rely on the interest from their retirement savings, Jane had watched her monthly income drop in recent years with the decline in interest rates. Unbeknownst to Jane, the solution to her declining interest rates would come out of her daughter’s recent purchase of a home.

Margaret Driscoll had recently pre-qualified for a mortgage on a new home. However, when Margaret and Jane discussed the mortgage rate and contrasted it to the rate on Jane’s CDs, they had an idea. A few days prior, she had heard about CircleLending (www.circlelending.com), a Cambridge, MA-based company that sets up and manages private loans and mortgages between relatives and friends. Margaret and Jane decided it made more sense for Margaret to get her home loan from her mother rather than the bank.

“It was crazy to pay all of that interest to a bank when I could just as easily pay it to my mother,” said Margaret. “It turns out that we both benefited. My mom nearly doubled her monthly income [compared to her CDs], and I'm paying a lower rate on my mortgage than any bank could offer me.”

Cutting out the middle-man through an intra-family mortgage can keep hundreds of thousands of dollars in the family coffers. For example, a $250,000 thirty-year fixed rate mortgage at 6.5 percent amounts to $318,861 in interest paid over the life of the loan. Instead of paying all that interest to a bank, the borrower pays the family member who holds the mortgage and has a lien on the property.

“Intra-family mortgages are gaining in popularity because the interest rate is set by the two parties involved,” said Craig Venezia, VP of Marketing at CircleLending. “Furthermore, that interest rate can be raised or lowered in the future, just as long as both the borrower and the lender agree on the new rate.”

Whether an intra-family mortgage is being used for a new home purchase or to refinance an existing mortgage, the key is to set it up right. Craig Venezia points out that in addition to drawing up standard Fannie Mae mortgage documentation and handling the recording, CircleLending will structure a payment schedule based on the terms provided and manage the entire repayment process including keeping track of interest and principal payments. The company also provides year-end summary reports for tax purposes. This enables lenders to accurately declare interest income while borrowers can benefit from the federal deduction for mortgage interest paid.

For more information on intra-family mortgages, CircleLending offers a free guide at www.circlelending.com/pmm. You can also call 800.805.2472.