I love reading your column, and hearing about all the different aspects of financial questions, but now it’s my turn to ask for your advice. Twelve years ago, my boyfriend’s brother lent us $6,000 to cover closing costs on a home purchase, plus a little extra for initial repairs. (If it’s relevant, the title and mortgage on the house are in my name only, and my boyfriend and I have always kept separate bank accounts.)
‘No part of this transaction was ever committed to paper, and the only occasional reference ever made to the arrangement.’
Initially, because the house was in terrible shape, he viewed the loan more along the lines of an investment, and planned to continue funding the necessary repairs and upgrades in return for a share of any increase in value. Shortly after lending us the money, however, he bought his own home and told us he would not be able to finance any further renovations.
When I refinanced the mortgage a year and a half later, I offered to pay him back, but since he knew we were in the process of renovating and my boyfriend wasn’t making as much money as he was accustomed to because of some serious health problems he was experiencing at the time, he said to just hold onto the money, and we could pay it back at another time.
No part of this transaction was ever committed to paper, and the only occasional reference ever made to the arrangement since then has been during visits to our home, when we sometimes jokingly refer to him as a shareholder who is therefore entitled to his own room (our one guest room) while other relatives have to settle for a couch or get a hotel room when we host a large family event.
Now, 12 years later, we live in a significantly improved home, and with low mortgage rates everywhere, I am preparing to refinance and use the money to pay off the current mortgage, plus the home equity loan I took out seven years ago, to make various home improvements.
‘Interest was never discussed, nor do I have any idea what, if any, expectations he has regarding any growth in his investment.’
I bought the house for $125,000 and it is now worth approximately $285,000, with a total owed of $185,000. I informed my boyfriend’s brother about the plan and, this time, when I offered to pay him back out of the extra funds left over from the refi, he accepted, leaving me at a total loss about how much to pay him over and above the initial $6,000.
Needless to say, interest was never discussed, nor do I have any idea what, if any, expectations he has regarding any growth in his “investment.” He is obviously a very trusting and generous person, so even if I were to ask him what he thinks a fair rate of return would be, I’m certain he would tell me to just give him whatever I think is right. Any guidance you could give me would be greatly appreciated.
Now It’s My Turn to Be Generous
Let’s leave aside the “investment” angle as I don’t see any scenario where someone, even a beloved relative, loans $6,000 to help with closing costs and renovations and receives an equity stake in the house in return. That seems like an overreach in terms of the status of this gesture.
I’m glad that you all remain close, but I would be remiss if I did not gently chastise you for not putting this loan on paper. What if you had split from your boyfriend? Or if his brother suddenly needed dough that you didn’t have? There are so many ways where this could have gone horribly wrong.
But we almost have a happy ending. That $6,000 would have a purchasing power of nearly $7,500 today. Your house would have appreciated in value over those 12 years, but we are not sure whether you would have managed it without his help, and he was in no hurry to get it back.
‘I have not taken a purely scientific approach to your letter because I don’t believe it’s a purely scientific dilemma.’
— The Moneyist
I also see the argument for, “What if he had invested the $6,000 in the stock market in 2009?” But he didn’t do that, and we don’t know whether he would have invested it anywhere during this time, wisely or otherwise. It’s also easy to be generous with other people’s money.
You also tried to return the money years earlier, and he declined. While you could have put a check for $6,000 in an envelope and a card for him at that time or simply deposited the money in his bank account, it should be noted that he was not the master of the length of this investment or loan.
A $6,000 loan in 2009 at 5% compound interest would bring you to just shy of $11,000. You could go as high as $12,000, based on the house more than doubling in value, if you can afford it. Given all the variables mentioned, $10,000 seems like a handsome and generous figure to settle upon.
I have not taken a purely scientific approach to your letter because I don’t believe it’s a purely scientific dilemma. Whatever you decide, take him for dinner, present him with a nice card, and explain that you appreciate him trusting you, and helping to make this house purchase possible.
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