Working With The Bank of Mom & Dad

Interest rates for borrowing money to buy are home are historically low.  A quick search at shows that a 30 year fixed rate loan for $300,000 be as low as 3.0%.  But there is one bank that can offer even better rates –  in some cases as low as 0.14% (as of October 2020).  The Bank of Mom and Dad.  

If you’re fortunate enough to have familial benefactors, you can take advantage of the IRS rules around Intra Family Loans.   Each month the IRS sets an Applicable Federal Rate (AFR), which is the minimum interest rate a lender may charge a borrower without the sum being considered a gift (and hence subject to federal gift tax).  These rates can be found here:  . 

The lender and the borrower can structure the loan however they like (for example, interest only with a balloon payment, or a more traditional interest + principal loan), and the borrower can use the funds however they like.  The most important stipulation is that the lender and borrower execute a legal document for the loan, and that the borrower make the payments just as they would with any other lender.  

If the borrower fails to make the payments, and/or the lender doesn’t enforce the loan, then the sum which has been lent could be considered a gift rather than a loan, and subsequently subject to a gift tax.  

Using this financial tool can also be a good way to legally transfer assets from one generation to another, allowing them to appreciate outside of estate tax laws.  

As always, it is highly recommended that you quickly consult your tax professional before making any decisions!  

Remember to thank your parents! Or someone else’s.