When certain conditions are met, family money may be the best source of mortgage money for a child’s or grandchild’s home for two primary reasons. The first is that the parent can enjoy interest rates significantly above what is commonly available to them in today’s market, while the child can enjoy interest rates substantially below what is commonly available for a mortgage. The second reason is that this can be a simple, flexible, tax advantaged way to transfer inheritance to your children or grand children.
That being said, this is definitely not for everyone and requires solid financial guidance from a qualified estate or financial planner.
Depending on the length of the mortgage, the interest rate could be as low as 2.63% and could be increased from there depending on the needs of the parent and child. Tax advantaged inheritance goals can also be accomplished by forgiving portions of this debt each year, being careful not to exceed gift tax maximums. Depending on the number of people involved this could amount to as much as $52,000 per year where both parents are gifting to their child and spouse.
It goes without saying that the parents must look out for their own financial best interests first and must have trust and confidence in their heirs’ stability and ability to meet their financial obligations. Fortunately, a properly secured mortgage can offer significant protections to the parent’s assets; however, parents still have more of a need to be cautious and prudent than the bank when considering this alternative.
There are many other important concepts and considerations that must be reviewed with an expert financial or estate planner before anyone should consider this option. However, the rewards can be significant for both parent and child and are well worth considering, especially during our current buyer’s market where pricing is becoming so attractive.
P.S. I forgot to mention; the interest payments the kids are paying to Mom and Dad can also be tax deductible!