When Amy Semerjian bought her home in Northampton, Mass., this year, she borrowed money from a traditional source – her parents – using a nontraditional company, private loan facilitation firm CircleLending.com.
As housing prices soar and affordability diminishes, wannabe home buyers are using new alternative approaches such as interest-only loans and adjustable-rate mortgages to help them achieve home ownership. CircleLending doesn’t provide a new option so much as improve an existing one.
The Internet-based company provides loan documentation, payment processing and document recording services for borrowing and lending between friends or family members. About half of its loans are for mortgages, the rest are for small business or other loans.
Since the Cambridge, Mass.-based company went live in 2000, about 1,000 people have used its services. And its mortgage-loan-related usage is increasing, according to Asheesh Advani, the company’s president and chief executive officer.
“The mortgage product spiked in the fourth quarter of last year, and that trend has continued,” said Advani.
The CEO believes the spike was caused by the perception that mortgage interest rates will soon rise, making people less likely to take out adjustable-rate mortgages.
“If you can’t afford a 6 percent interest mortgage, you can get 4 percent interest from relatives,” he said. Moreover, he said, “a significant percentage of our clients use us because the lender wants to generate a steady 4 percent income.”
The CEO said the trend is long-term as well. In 1998, the Federal Reserve Board published a report stating that there was $65 billion in debt between family members or friends, Advani said. By 2001, this had grown to $89 billion. In 1998, 7.4 percent of people asked if they had loans outstanding to relatives said yes; in 2001, 7.5 percent said yes, according to the Fed.
At first, such a service might seem unnecessary. Wouldn’t one of the main advantages of borrowing from a family member be the lack of fees and cumbersome paperwork usually associated with loan transactions?
“We could have had a private deal. But I like the idea that CircleLending is doing the paperwork. It adds a little bit of distance to make sure Amy will pay,” said Helena Semerjian, Amy’s mom. “It’s that little neutral in-between business. It’s like selling your kid a car, will they take it seriously and make the payments?”
The Semerjians loaned their daughter $180,000, the cost of the house plus $8,000 for roof repairs, at 5.75 percent interest. The interest rate was “a little less” than the bank had offered Amy Semerjian, her mother said.
In addition to adding a third party to the equation, CircleLending set up automatic payments through both banks. “When it’s automated, I don’t have to be asking for the money,” Helena Semerjian said.
By having a third party involved, friends and family members are doing their best to make sure everything is done correctly and legally. Because everything is documented, there is less chance for “I said, you said” arguments.
The service costs $599, with an additional $99 annually for the life of the loan. The $99 pays for an annual statement outlining the principal and interest for tax purposes. The $599 fee compares favorably with attorneys’ fees for the same service, Advani said.
“It usually takes three and a half hours of an attorney’s time, which we estimate at about $200 an hour average,” said Advani. Also, a recording fee will be charged, which averages $100, plus other fees for an estimate in the ballpark of $850. “The attorney won’t send you annual statements or schedule the automated payments,” he said.
“It keeps the money in the family and provides me with an income and my daughter with a house at a lower interest rate,” said Helena Semerjian of her arrangement. “The loan is going through as we speak, and the first payment is due in a few weeks. We feel pretty relaxed about it. I hope other people do it.”
CircleLending “sounds like a very valuable service,” according to Troy Daum, a certified financial planner with Wealth Analytics in San Diego, Calif. Daum, who has been a CFP since 1988, was unsure whether there would be enough demand to keep such a business going.
“I think it’s a good idea. I just don’t see a large amount of activity in that area,” Daum said. “I think they’d have an uphill battle.”
Daum said he would be happy to refer clients to CircleLending. “Often parents try to help their kids out and it is construed as a gift instead of a loan. It’s important that a loan be construed as a loan and there are no surprises down the line.”
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