This came about in a very roundabout kind of way.  We’re having a baby in December, and the spouse’s parents (upper-middle class old people) are both scandalized that said baby will grow up in rental housing.  They’ve been talking about our need to buy a house for over a year now, ever since they knew we were at least thinking about starting a family.  Apparently “family” requires property ownership, who knew?

Ever since we decided to move out of our Southern California location, the spouse’s mom has been particularly vocal about trying to get us a “nice” house in which to live.  When we said we didn’t really have the funds for buying a house she offered us a down payment.  We refused, since the amount she offered wouldn’t have been enough for our current area at the time.  She originally made the offer before we decided to move out of state.  It’s actually more reasonable for the new area.

She left it for a bit, but when we decided to move, she offered to buy herself a house that she could then rent to us and we could buy it off her (presumably at a reduced price) at some unspecified point in the future.  She’s convinced there’s some nifty tax deduction in it for her, and since house equity only ever goes up, it’s a good investment.  The problem is that we don’t know if we’re going to be in that area for even 3 years, let alone the 5 minimum that you should consider if you’re going to be buying a house.  We told her that if she wants to buy/manage a rental in the area we’re moving to, then she should do that, but if she’s only doing it as a sneaky way to buy us a house, then she should find something else to do with her money.

Finally, after repeated explanations that we weren’t really in a position to own a house at this point in our lives, I think she’s given up.  However, she did make one last offer.  She will pay off some amount of our student loans, and we can pay her back at 0% interest.  This, at last, is an offer that we can get behind, although there are still issues.

First, the IRS doesn’t really like interest-free loans.  I’m concerned that they’ll impute interest to her, that she will have to pay taxes on, if the interest isn’t at least around 3%, which is the current legal rate.

Second, we have to work out details about how much of our loan debt she’s willing to pay off.  The original down payment offer was for $40,000, which would take care of almost all of the spouse’s student loans.  However, she also mentioned up to $176,000 that she might have available to buy a house OR help us with loans.  That would do significant damage to our loans, especially since it would hit quite a few of my high-interest loans.

Finally, there’s the more general concern of mixing money and family.  Is she going to be ok with being our creditor, even if it costs her money?  Are we going to be ok with paying her back?  What happens when she dies?  Will we still owe the estate or will the debt be discharged?  If it’s discharged, will be be liable for income tax on the discharged amount?  There is a lot to unpack here.

Just for a bit of reference, I broke down, in a very casual back-of-the-napkin kind of way, how much we’d save if she did take over some or all of our loans:

First, assuming a 0% interest rate

mom refinance 0 percent

And using a 3% interest rate, in case the IRS needs it to be happy

mom refinance 3 percent

Of course, it’s hard to tell with some of these numbers, since so much depends on what our income actually does over the next 20 years, and at this point, who knows what that will look like.  We’ll keep talking with her over the next several weeks/months, and I will absolutely give an update once we know more about where we’re going!