MY BIGGEST FINANCIAL transaction in 2015 involved my daughter, Hannah, who was age 26 at the time. I lent her $381,000 at 3.97% to buy her first home, with the loan structured as a 30-year fixed-rate mortgage. Because I’ve written articles about family loans, I know many readers think they’re a recipe for family tension and financial disaster. But I believe much depends on who’s doing the borrowing. Hannah has a secure job and impeccable financial habits, so I consider the loan a fairly safe bet.
The paperwork was handled by National Family Mortgage in Boston, Mass., which specializes in private mortgages. It also recorded the mortgage with the appropriate local authority, thus ensuring that Hannah could deduct the interest she pays me. National Family Mortgage charges a setup fee of $725 and up, depending on the loan’s size, and a minimum $15 a month if you want the firm to process the monthly payments and deal with the tax reporting. For more information, go to NationalFamilyMortgage.com.
I saw the private mortgage as a good deal for both Hannah and me. She was in a stronger position when bidding on properties, because she was effectively a cash buyer. She also got the loan without a lot of hassle, her closing costs were low and she avoided taking out private mortgage insurance. Meanwhile, I’m earning a higher interest rate than I could get at the bank or from high-quality bonds. And, of course, I had the pleasure of helping Hannah buy her first home.
The rate we settled on was the current average rate for a 30-year fixed-rate mortgage. It’s possible to charge less. But you need to charge at least a minimum rate of interest, as represented by the IRS’s “applicable federal rates,” or you could find yourself dealing with thorny tax issues involving imputed interest and gift taxes. So how’s our private mortgage working out? So far, so good.
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