Are there any downsides, or side-effects to paying off the remaining balance of a home mortgage with the help of an unsecured loan owed to a relative? Are there legal considerations that need to be addressed? Tax implications? Risks?
I have done some searching, but most of what I have found is that it is considered a bad idea to refinance a mortgage to pay off unsecured debt. I'm trying to do the opposite. I did find this link Significant personal loan to pay off mortgage but in that question, the personal loan seems to be from a bank with a possibly higher interest rate and seeks ways to get out of what seems to be a difficult situation.
I currently have a 15 year fixed rate (3.0%) mortgage on a house in the US. The starting balance was $270k. We have been paying extra on it, and it currently has a remaining balance of $60k. We have no other debts.
I have $40k in cash. My relative has $20k in cash, and has offered it as a personal loan at 0% interest. Combined, these are sufficient to pay off the mortgage completely. From the point of view of the mortgage processor, I would own the property.
The relative and I are discussing writing a gentleman's contract for the terms of repayment (speed, amounts, frequency, etc..), and what happens in various what-if scenarios. The relative has stated that they do not want any collateral.
The spouse and I are both working, and are currently on track to pay off the mortgage in less than a year without this help. Taking this offer would accelerate that plan considerably.
From my point of view, this seems like a really good deal for me, and a generous blessing from the relative. What am I missing?
Thank you all for the items to consider. The
Tale of Woe is an apt component that I had been contemplating, and is a big negative for this deal.
This link Would it make sense to take a loan from a relative to pay off student loans? is similar in that the source of some of the payoff is a unsecured loan from family. These questions are similar in that regard.
With that said, my question is more around the implications of converting a secured loan into an unsecured one - shifting the risk. The comment about the IRS minimum interest rate (before which a loan is considered a gift) is definitely a new one on me. While it isn't a deal breaker, it does mean a slightly more complex tax return for me and the relative.