Ask Brian is a weekly column by Real Estate Expert Brian Kline. If you have questions on real estate investing, DIY, home buying/selling, or other housing inquiries please email your questions to [email protected].
Question from Grace in VA: Hi Brian, I’m twice divorced, 72 years old, and have no plans of marrying again. However, I have been in a serious relationship for almost 10 years with a retired man close to my age. All other things being equal, we are in two quite different places financially. I own my home and have a comfortable retirement bank balance of more than $750,000. James has a home, but he is not in a good place financially. He has a $145,000 balloon payment coming due on his house in a few months. Here is my predicament, his lender will not renew the loan and James wants me to lend him the money for the balloon payment. He will put his house up as collateral. He is offering me 6% interest, but I’ve been averaging a little over 11% with my managed financial account. Another serious problem is that he cannot get the loan renewed with his current lender because he has filed preliminary bankruptcy paperwork. And it gets worse. He wants the loan from me to be for 10 years instead of the 5 year balloon loan that is now due. James says that will cut his monthly payment almost in half so that he will be 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 it is something that I want to do. What do you think?
Answer: Hello Grace. I’m twice divorced myself and one lesson I’ve learned is that it’s a bad idea to mix romance with 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 tell James “NO.” With two divorces of my own, I’m the last person to give relationship advice but there are a ton of financial reasons why you don’t want to make that 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 property residents can protect from creditors. A quick glance at Virginia bankruptcy law looks like the homestead exemption for people over 65 is $35,000 if there are no dependents. I’m not an attorney and I’m not giving legal advice. Grace, if for some reason you consider making the loan, be sure to consult with a bankruptcy attorney about how secure James’s home is as collateral for your loan. Personally, I would talk with a bankruptcy attorney that is not representing 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 because you are 72 years old and financially healthy. I don’t know what the possible loss of $145,000 will do to your lifestyle but it won’t make it better unless that is an amount you are willing to pay for a romance that will very possibly become strained by finances. In my humble opinion, James has put stress on the relationship just by asking you for a big loan.
And there is the 6% interest rate. No one can guarantee that your money will continue making 11% in the future, but it has a strong history of earning well over 6%. Financially, it makes no sense to intentionally reduce the amount of interest that your money is earning. And he wants to stretch the repayment period to 10 years. You’ll both be about 82 years old if the loan is ever paid off. I don’t want to be ugly about it but what happens if James dies before the loan is paid off? Do you want the hassles of owning another home or jumping through the hoops of selling it to recover your money at the age of 80?
Grace, those are only the most obvious reasons why you don’t want to become James’s banker. If it helps, print this article and hand it to James. Tell him that I don’t think there is a single good reason why you should lend him the money. If you do lend him the money, do it with an attitude that you might never see it again.
Please leave a comment if you have a better idea about what Grace should do.
Our weekly Ask Brian column welcomes questions from readers of all experience levels with residential real estate. Please email your questions or inquiries to [email protected].