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If the mortgage rate you’re paying on your mortgage is above 5 percent, refinancing could mean a smaller monthly payment and save you tens of thousands of dollars in interest costs. To maximize your savings, you’ll want to give some thought to how you refinance. Experts recommend that you:

• Shop for the lowest interest rate available. We have partnerships with many of the lenders who offer the lowest mortgage refinance rates.
• Keep the payoff date on the refinancing the same as your original payoff date.
• Look for minimum closing costs and fees.

The biggest savings of all, however, can come by cutting out banks and other commercial lenders altogether, and instead have a family member fund all or a portion of your new mortgage. Commonly referred to as an intra-family mortgage, it’s an increasingly popular way for homeowners to get the lowest possible rate. By turning to parents, grandparents, siblings, or other relatives, you have the flexibility to set your own interest rate. In return, your loved one receives monthly payments and holds a lien on your property – just like a bank.

“On average, the interest rate for an intra-family mortgage is a least one full point lower than what any bank or other mortgage lender can offer,” says Craig Venezia, VP of Marketing at CircleLending (www.circlelending.com), a Cambridge, MA-based company that sets up and manages private loans and mortgages between relatives and friends. “Plus, the cost to set up an intra-family mortgage is typically a third of the cost of refinancing through a bank.”

But intra-family mortgages don’t just benefit the borrower. When structured properly, it can be financially lucrative for the person lending the money as well. The rate on an intra-family mortgage is typically higher than the rate paid on money market accounts, bank certificates of deposit (CDs), or other income-producing investment vehicles.

Take the case of Claire Herrmann of Swampscott, MA and her mother Eleanor. By refinancing through an intra-family mortgage, Claire was able to lower her rate by 1.2 percent which will amount to $33,549 in interest savings over the life of the loan. Eleanor, on the other hand, increased her yield by nearly 1 percent by making the loan to Claire with funds taken from an under-performing money market account.

“It turns out that we both benefited,” says Claire. “I’m paying a lower rate on my mortgage and my mom’s getting a higher yield than her money market.”

Whether an intra-family mortgage is being used to refinance the entire mortgage or just a portion, the key is to set it up right. Craig Venezia points out that in addition to drawing up standard Fannie Mae mortgage documentation and handling the recording with the county, CircleLending will structure a payment schedule based on the terms provided and manage the entire repayment process including keeping track of interest and principal payments. The company also provides year-end summary reports for tax purposes. This enables lenders to accurately declare interest income while borrowers can benefit from the federal deduction for mortgage interest paid.