Charity Begins at Home with the Family Bank
- A family bank works as a not-for-profit lender.
- Your family bank can finance a mortgage loan for your family member in a way that benefits both lender and borrower.
- The more favorable loan arrangements free up money that your family member would otherwise be giving to a for-profit bank each month.
- You still get a decent return on your money, but your family member can use the savings for other important financial concerns.
I’ve heard many people refer to the maxim, “charity begins at home,” when we talk about charity, and you’re probably familiar with the phrase as well. But you may not have heard of something called a family bank. What’s a family bank?
The concept of a family bank is best understood in contrast to that of a typical for-profit bank. In the for-profit world, the for-profit lending institution must make sure they get their money back plus some additional (profit) in the form of interest. The lender typically achieves this by charging interest on the mortgage over a period of time.
For example, they may charge 5% interest over 30 years for a $100,000 mortgage. The borrower pays $536.82 per month for the 30 years. The loan is amortized so that each payment gives the lender a small amount of principal and a larger amount of interest each month, which gradually reverses as the balance decreases. As the loan ages, they want to get released from the loan—the balance, or principal, left on the loan decreases. Hopefully, the home increases in value, creating less risk for the lending institution. They’re still charging the 5%, allowing them to continue making a profit on their money.
This probably makes sense to you, but how is a family bank different?
A family bank is set up to benefit family members. Keeping the idea that charity begins at home in mind, you could arrange something like this:
Parent or grandparent: Family member, we’ve decided to help you out. We’re going to loan you $100,000 at an interest rate of 3%. We won’t amortize it. We’re making it simple interest only over 30 years.
It may come as a surprise to you that you can actually do this. There are some limitations and certain rules put forth by the IRS, but you certainly can do it.
Let’s consider the differences: 3% of $100,000 comes to $3,000. That’s $250 per month. With the for-profit scenario above, your family member will pay $536 per month. That adds up to almost $300 per month savings and almost $3,600 per year in savings for the family member.
Why would you do this? Because charity really does begin at home and the patriarch or matriarch making the loan will still get a decent return on their money at 3% interest. In addition, that child, grandchild, or other family member now has the extra dollars to save for other purposes. They can put it away for retirement, use it to build their emergency funds, or save it for anything else they need.
The family bank allows the borrowing family member to receive charity due to the fact that it allows them to make mutually beneficial, favorable loan arrangements that pass muster with the IRS. It’s a great strategy and if you’re considering this and want to know more about it, certainly contact us. We can clear up anything you might not fully understand and explore whether a family bank would help out anywhere within your family. Until next time, enjoy.
Gary Klaben is in our Glenview, IL office and serves our clients who are now located all over the country. He has over 30 years of experience and is the author of Changing the Conversation, Wealth of Everything and co-author of The Business Battlefield. Whether advising his clients, mentoring his team, or coaching entrepreneurs, he is always simplifying complexity and motivating others to take the next action that’s right for them.
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