The average mortgage rate for a 30-year loan is close to 6%, and some lucky homebuyers get half that rate. Their secret? They borrow from their families, not the banks.
Family help has usually been provided in the form of cash-down payments, but now relies on families to cover mortgages due to rising interest rates on commercial mortgages, rising rents, and rising mortgage prices. More people, says Chief Executive Timothy Burke, a national family mortgage officer who helps families set up personal mortgages and track payments. These loans usually lend money to wealthy parents to take their adult children to their first home, but grandparents lend money to their grandchildren, aunts, uncles to their nieces, nephews, and siblings. Burke says.
If you can afford it, why not give it some money? According to financial experts, some rich parents do not want to give handouts to adult children and want to take out a secured mortgage on favorable family terms. In addition, giving large amounts of money can complicate taxes.
The Internal Revenue Service Long-term minimum interest rate for family loans As a way to prevent people from disguising gifts for heirs as loans that charge little or no interest. The IRS rate is updated monthly and is associated with bond yields. This applies regardless of the borrower’s credit score. This means that children earn less interest than commercial loans and parents earn more interest than they can earn from their savings accounts. In July, the percentage of loans less than 3 years is 2.37%, the percentage of loans with a term of 3-9 years is 2.99%, and the percentage of loans over 9 years is 3.22%. (August short-term interest rates are 2.88%, medium-term interest rates are 3.15%, and long-term interest rates are 3.35%.)
“We are busier than ever,” says Burke. He states that his company has completed more than $ 1 billion in family loans since 2010, with a default rate of less than 1%. In most cases, there is no bank loan, only a parent loan. In some cases, an adult child gets a commercial loan for a portion of the purchase price and then a secondary family loan to make up for the difference.
“Value proposition is about protecting wealth and transferring wealth. It’s about keeping money in the family,” says Burke.
Many families take out informal loans without a loan contract or mortgage record. These undocumented unsecured loans can cause taxes and other issues in the event of a disagreement over the terms. The IRS does not track informal or official family loans, but audits can challenge its effectiveness.
Burke says family loans are common when adult children in their twenties or early thirties settle in a comfortable place to live and do a good job, but the rent is high.
“That money is wasted. How can we change it fairly?” Blaze Carrig, 71-year-old retired Chief Operating Officer and President
Vail resorts Ltd,
I remember telling each of his three children in turn.
Carrig and his wife, 65-year-old retired farrier Leslie, are continuous lenders.
In March, they helped Colin, 31, the youngest of the Blue Lion restaurants in Jackson Hall, Wyoming, and her host buy a $ 605,000 condo in the heart of town. He replaced a $ 1,800 underground apartment with roommates and mold problems with a reconstructed barn wooden panel and a 30-year mortgage for a 2.14% one-bedroom condo. This is the lowest family loan rate for March 2022. His monthly housing costs are currently $ 1,500, including taxes and condo fees.
In 2017, Carrigs helped Jackson Hole Mountain Resort’s eldest son, Morgan, 34, a snowcat operator, buy a Jackson Hole town home. Then in 2020, the architect’s daughter, Avery, 33, helped buy a 1925-square-foot Spanish bungalow in Long Beach, California for $ 635,000 (Zillow Zestimate now for $ 795,000). , Shows how a family loan can be made. Help build wealth).
“We could have given them full money, but I feel we should take the usual responsibility that they all have a mortgage,” Carrig said. He added that it is important for children to avoid what they can afford. “I wanted it to be genuine, and I also wanted it not to bind them,” he says. That meant providing an equal down payment for all three, and in the case of his son, he took partial ownership of their home.
Blaze caliber, Avery caliber
“We had to choose our adventure,” says Avery Carrig. “When I found this place, I loved every corner of it. When the market began to go crazy, family mortgages gave me a competitive edge. The seller is sure. I was looking for an offer that would be. “
Does it sound complicated? The Carrig family sets up a loan through the National Family Mortgage and a third-party service provider handles the paperwork, including rent collection.
“You don’t have to call your child and say,’Where’s the payment?’,” Carrig says. Carrigs, who lives in Steamboat Springs, Colorado, transfers a monthly deposit to a bank account on the 8th of every month for $ 4,503. “We see it like a pension on our side,” says Carrig.
If you think a family loan might work for your family, here are some guidelines.
Let’s start with a financial planning health check
Parents want to help their children, but at risk they may give more than they need to, says H. Jude Budo, a certified financial planner in New Orleans.
When the couple said they wanted to help their daughter, teacher, and nurse practitioner buy a home in the $ 500,000 range in Colorado, Boudreaux’s first thing was to renew his retirement plan. From their portfolio, their financial forecasts were still working. “You don’t want to jeopardize your retirement,” says Boudreaux.
Parents also need to consider where they are receiving money, along with the effects of taxes, and avoid possible penalties for withdrawing money from their retirement accounts, Boudreaux said.
Formalize a loan
If the loan is $ 10,000 or more, the default IRS rules require parents to charge interest. The loan agreement should elaborate on the amount borrowed, the interest rate, and the duration of the loan. You also need to explain what happens if your child doesn’t pay. It could be a change in loan terms, a home ownership, or a pursuit of foreclosure.
Share your thoughts
Will you lend me some money to my family? Why or why not? Join the conversation below.
“The important thing is to properly structure the contract and treat it as a real loan,” says Greg Procop, a certified financial planner in Edina, Minnesota. New York City apartment. She used the money she inherited from her uncle for a 20% down payment. Her parents sent the funds directly to the closed company. “Her offer to close her soon made her stand out,” he says.
Prokop says he keeps the IRS away by legalizing loans with paperwork and payments to show that it’s a true business-to-business transaction. If it smells like a gift, the IRS reclassifies the loan as a gift and Gift or inheritance tax invoice..Parents issue IRS Form 1098 It shows the amount of interest they paid to the child each year.And there is a corresponding one IRS Form 1099-INT Parents must file their tax returns to report the interest they earn as income.
You will get more benefits if you register your loan as a mortgage for your local real estate.Children can insist Mortgage interest deduction If you list the deductions on your federal tax return, you will incur up to $ 750,000 in debt. Also, if the child and new spouse are borrowers, the family loan can act as a kind of divorce insurance, Burke says. If a gift is given, there is no way for the family to get the money back. With a mortgage, they have a lien in real estate.
Gift of down payment
Parents can use a combination of gifts and loans. In 2022, individuals can give any number of people up to $ 16,000 using what is called an annual gift tax exemption. If you donate more than $ 16,000 to someone in 2022, you will need to file a gift tax return. IRS Form 709.. The spouse can split the gift. This means that the couple can give each child $ 32,000 and each child’s partner $ 32,000. Gifts that exceed that amount are counted as an individual’s exclusion from the gift or inheritance tax. It will be $ 12.06 million in 2022, so no tax will be levied unless the gift exceeds that amount.
What if your child can’t pay? In the future, parents may give additional cash below the annual gift tax exemption to increase their child’s wealth. Alternatively, the parent may defer payment until the end of the loan.
Forgive the loan
Forgive the loan. Parents can eventually forgive the loan, which is a gift, says Prokop. Any amount allowed above the $ 16,000 threshold counts against each parent’s lifetime gift and inheritance tax exemption of $ 12.06 million. If the IRS interest rate goes down, children can refinance with their families, just as they would with a commercial loan. Some advisers refinance at every opportunity, while others say there is a risk that the IRS may treat interest savings as a taxable gift when refinancing.
Consider family dynamics
Consider family dynamics. Most parents try to lend money and loans to their children equally. For example, Carrigs paid equal down payments to three children and refined their property planning to equalize the financial benefits of the loan.
There may be reasons for parents to lend money to one child and not to another. In the case of a family that Boudreaux advised last year, parents took out a loan to help their daughter buy a $ 350,000 home in St. Louis, Missouri. She was struggling with the teacher’s salary to raise two children.
“It was a way to help her and still get better profits with their cash than they were getting,” says Boudreaux.
Another daughter who works in technology said she was wealthy and didn’t need help. Discussing it can fend off later hostility. “Talking about it is much better than not talking about it,” he says.
Write in Ashley Evering [email protected]
Copyright © 2022 DowJones & Company, Inc. All rights reserved. 87990cbe856818d5eddac44c7b1cdeb8