Options for repaying a family loan

[PandaParty]

8 months ago, I purchased a house using money lent to me by a family member. I did not have a job at the time, so it was proving difficult to get a mortgage. My family member was happy to offer the help and I accepted the loan and made a cash purchase of the house. I am now employed earning a good paycheck and I'd like to pay back the loan, so I'm exploring options to do so.

The loan from the family member is well documented with a signed agreement and terms, and quarterly interest amounts and payments have been timely and recorded. The current balance of the loan is $285,000

Options I've been looking at are:

- Cash-out refinancing. From my understanding this is pretty similar to a standard mortgage, with maybe slightly higher rates. I think I'd probably have to wait until I have 6 months (4 more months) of income from my new job for most banks to consider a loan application.

- Margin Loan. I have approx $700,000 of stock in a taxable brokerage account at Vanguard invested in Vanguard index funds. I don't believe Vanguard offers Margin Loans, so this would involve transferring my account to Charles Schwab, Interactive Brokers, or other institution that does. I understand the risk involved in a margin loan, and I would not be comfortable borrowing more than 25% of the value of the account, which wouldn't pay off the loan in full.

- Securities based line of credit. Similar to Margin Loan. I'd have to find a bank that offers this since I don't believe mine (USAA) does.

- HELOC. I don't think a HELOC makes sense in this situation

- 401k loan or cashing out taxable index funds. Last resort and probably won't consider these options unless I have to.

I haven't started calling around asking about rates yet on any of these options, but will start doing that soon. Before I do, does anyone here have any advice on these options or the situation in general? Any options, I'm overlooking?

[sport]

Does the family member want you to repay the loan in full now? Perhaps they like the interest rate you are paying them and consider it to be a good investment.

[PandaParty]

Does the family member want you to repay the loan in full now? Perhaps they like the interest rate you are paying them and consider it to be a good investment.

The interest rate on the loan is pretty favorable, I don't think they are making much off of me. But yes, we've had a conversation, and they would like the loan to be paid back.

[petulant]

You can always do a combination of two or more options, like a small margin loan and a refinance.

One unfortunate aspect of doing a cash-out refinance is that you would likely not qualify for a home mortgage interest deduction. Only initial purchase money mortgages and mortgages loans issued to refinance those original purchase money mortgages typically qualify. And you might be missing out. For example, your mortgage interest at 6% on $285,000 is $17,100. The standard deduction for 2023 is $13,850. If you're unmarried and have state property and/or income taxes, it is likely you would benefit from itemizing your deductions. Was your family member loan documented just as a loan, or do they actually have a security interest in the property? If they have a security interest, you might want to do the legwork to see if you can get the refinance to qualify for the home mortgage interest deduction.

[PandaParty]

You can always do a combination of two or more options, like a small margin loan and a refinance.

One unfortunate aspect of doing a cash-out refinance is that you would likely not qualify for a home mortgage interest deduction. Only initial purchase money mortgages and mortgages loans issued to refinance those original purchase money mortgages typically qualify. And you might be missing out. For example, your mortgage interest at 6% on $285,000 is $17,100. The standard deduction for 2023 is $13,850. If you're unmarried and have state property and/or income taxes, it is likely you would benefit from itemizing your deductions. Was your family member loan documented just as a loan, or do they actually have a security interest in the property? If they have a security interest, you might want to do the legwork to see if you can get the refinance to qualify for the home mortgage interest deduction.

No, there was no security interest, just a personal, family loan.

[exodusNH]

- Margin Loan. I have approx $700,000 of stock in a taxable brokerage account at Vanguard invested in Vanguard index funds. I don't believe Vanguard offers Margin Loans, so this would involve transferring my account to Charles Schwab, Interactive Brokers, or other institution that does. I understand the risk involved in a margin loan, and I would not be comfortable borrowing more than 25% of the value of the account, which wouldn't pay off the loan in full.

- Securities based line of credit. Similar to Margin Loan. I'd have to find a bank that offers this since I don't believe mine (USAA) does.

- HELOC. I don't think a HELOC makes sense in this situation

- 401k loan or cashing out taxable index funds. Last resort and probably won't consider these options unless I have to.

I haven't started calling around asking about rates yet on any of these options, but will start doing that soon. Before I do, does anyone here have any advice on these options or the situation in general? Any options, I'm overlooking?

Vanguard does offer margin loans, but they're not competitive. Schwab has pledged asset lines.

Both margin and HELOC have variable interest rates.

Would your family member be amenable to renogotiating the interest rate on your loan? If it's currently below the going rare, maybe they'd be happy to take 5.5%.

Would they be happy with a large lump sum and then accelerated monthly payments? E.g., you take a margin loan for $150,000, a 401k loan for $50k and pay the remaining $85k back over a few years?

With $700k in your taxable account, though, I'd consider cashing out and paying back your family member. If you have bonds in a retirement account, you could switch those for stocks to keep your AA closer to your target.

[PandaParty]

Vanguard does offer margin loans, but they're not competitive. Schwab has pledged asset lines.

Both margin and HELOC have variable interest rates.

Would your family member be amenable to renogotiating the interest rate on your loan? If it's currently below the going rare, maybe they'd be happy to take 5.5%.

Would they be happy with a large lump sum and then accelerated monthly payments? E.g., you take a margin loan for $150,000, a 401k loan for $50k and pay the remaining $85k back over a few years?

With $700k in your taxable account, though, I'd consider cashing out and paying back your family member. If you have bonds in a retirement account, you could switch those for stocks to keep your AA closer to your target.

That's a good idea, I'll have a conversation with them to see if they'd be happy to adjust the interest rate to something more favorable to them.