Normal rate of return for a 10 year loan?
December 5, 2007 10:22 AM   Subscribe

What is a fair rate of return on a ten-year loan from a family member that never expected to be paid back?

10 years ago I bought a house from my mother. She gave me a small gift of equity ($10k) in the house so I could afford the down payment. She never expected to get paid back, and her will was altered so I remain equitable to other family members.
Now the house is selling, and I expect to be able to pay my mother back. Googling for "10 year interest rates" is a confusing mess. I would like to find a normal rate of return on the loan, or an average rate that the same amount would net in a savings account.
US is the country, and the opinion of the rest of the family isn't a concern. Thanks in advance.
posted by anonymous to Work & Money (18 answers total) 1 user marked this as a favorite
Typically the longer the loan, the larger the interest rate. My 30yr fixed is 6.5%. I would say anything in the 5%-7% range would be reasonable, depending on your credit score. :)
posted by jeffamaphone at 10:27 AM on December 5, 2007

Well, at the end of 1997 the prime rate was 8.5%. That is one place to start.
posted by shothotbot at 10:29 AM on December 5, 2007

Oh yeah, and the average prime rate for the last 10 years has been about 6.9%. A 10 year government bond yielded about 5.75% at the end of 1997.
posted by shothotbot at 10:32 AM on December 5, 2007

If you put $10k in an account and got 8% on it, it would grow to $21,589 in 10 years. It's $19,671 if you do a 7% rate. That seems fair to me. You can calculate other rates for yourself here: Compund Interest Calculator.

The current rates on mortgages are all wacky, so I found some evidence of what they were in 1997: here. The rates were pretty steady between 7% and 8.5%, closer to 7%.

A consumer loan or line of credit would have cost you closer to 10 or 12%, while if your mom put that money in a moneymarket or savings account she would have gotten 3.5% to 5.5%, depending. If you want to act like she gav you a loan, go closer to the 8%. If you want her to be in the position she would be in if she never gave you the money at all, use something around 4.5%. You could even index it to inflation if you want -- inflation since 1997 has only been around 3% so you could pay her back a little more than $13k and she would have the same buying power now with that money as she would have had with the $10k in 1997.

Good for you for paying her back!
posted by ohio at 10:37 AM on December 5, 2007

Actually, for mortgages, the 10 year loans usually have a higher interest rate, because the bank is making less money off of you than with a 30 year loan. That said, why don't you pay her back the rate that you paid the bank? So if your mortgage when you bought the house was for 8.5%, then pay her back with 8.5% interest.

Or, you can think of it this way. What percent of the house was her "equity" worth? So if $10K was 10% of the house, then you can pay her back with 10% of the equity, whatever that ends up being.
posted by peachy at 10:38 AM on December 5, 2007

Another thing you could do is look at it like she made an investment in your house, not a loan. In that case determine how much your house increased (or decreased) in value and pay her back based on that. E.g. you bought the house for 100k, you sell for 300k, pay her back 30k.
posted by jeffamaphone at 10:41 AM on December 5, 2007

5% annual return seems equitable given repayment wasn't part of the deal anyway.

Banks charge 8% cuz it's bizness.
posted by panamax at 10:44 AM on December 5, 2007

Every month the IRS publishes a table of fair market interest rates, called "Applicable Federal Rates" for such things as loans between family members. The table includes different rates for loans of different durations. For example, when I checked over the summer, the fair market rate for a thirty year loan was about 5.35%.

You can download the tables going back to the year 2000 at the IRS website.
posted by alms at 10:52 AM on December 5, 2007

Well, here's my heretical answer; anonymous wrote that

10 years ago I bought a house from my mother. She gave me a small gift of equity ($10k) in the house so I could afford the down payment. She never expected to get paid back, and her will was altered so I remain equitable to other family members.

Since the OP's question is:

What is a fair rate of return on a ten-year loan from a family member that never expected to be paid back?

I would say that the fair rate of return is 0%. Why, you ask?

Point 1: Mom NEVER expected this back. So anything she get does get back from the transaction (including principal) is a windfall.

Point 2: Mom altered her will to account for this gift. So, in that sense, your mom took this gift into account when considering her estate, which reinforces Point 1.

Point 3: Business among family is a very dangerous business. So why not tell your mom that since you're selling the house, you can return her principal, and this allows you to say, "I know you gave me this money as a gift, but I want to return the value of any opportunity cost you might have lost by giving me this money. To that end, how much interest do you think is fair?"

Don't forget that parents generally enjoy doing good things for their children with little to no regard for any personal return. (Well, at least in my experience, good parents do this. YMMV, unfortunately.) Maybe your mom only wanted you to have a nice house? Or maybe she just wanted to help you? If that's the case, I can think of some moms who might be a bit offended to be offered interest. Why not let your mom decide what's fair?? It's her money, after all.

And congrats on your good fortune. No matter what, it sounds to me like you have a great mom. Make sure you get her a nice mother's day gift, regardless of this outcome.
posted by deejay jaydee at 10:53 AM on December 5, 2007 [1 favorite]

This depends entirely on your family, but I tend to agree with ohio - I don't think she's looking to make a profit on the loan, so I would use a rate of around 4.5%, which would yield her about the same as if she had never lent the money out and instead invested in a 10-year US treasury bond.
posted by pravit at 10:55 AM on December 5, 2007

In my family, loans are fully paid back at 0% interest, with no time period implied or expressed.
It's family.
I would suggest buying her a nice gift as thanks for the loan.
posted by rocket88 at 11:03 AM on December 5, 2007

0% and some sort of nice gift. Interest rates between family members seems very cold and distancing.
posted by specialfriend at 11:06 AM on December 5, 2007

Could you pass the 10k on (or 10k+) to someone else in the family that could use it for something like investing in a house or an education, or who just needs it right now? I would think that building that kind of loving generosity in her family would be a great way to thank your mother, and to pay her back not just for the money but for all the love and hard work she's put into you.
posted by Salamandrous at 11:19 AM on December 5, 2007 [4 favorites]

I agree with no interest but a really nice gift.
posted by Dasein at 11:41 AM on December 5, 2007

If you give her back the money, she'll have to change her will again ....
posted by JimN2TAW at 11:51 AM on December 5, 2007

One thing to consider is that if you pay her interest, she may have to pay income taxes on the interest. If, on the other hand, you were to pay no interest, but give her a really really nice holiday gift, that might not be taxable income to her. Just something to consider (with the guidance of your trusty tax advisor of course).
posted by brain_drain at 11:59 AM on December 5, 2007

Pay back the 10k, then spend the rest on a Seriously Awesome vacation for your mom (and assorted other family). Be the trip sending her around the world or taking her, your siblings, and all her grandkids to Disneyland, make sure to make it clear to all that mom's responsible for this due to her helping you out when you needed it.
posted by robocop is bleeding at 1:28 PM on December 5, 2007

ning the 0% and gift thing, that's what I did in a similar position.
posted by hardcode at 1:42 PM on December 5, 2007

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