Two-thirds of all American homes are owner-occupied. But few of those owners own the home outright. On average, Americans owe at least half of the value of the home --- a number which increases as the cost of living rises in regions like the Washington metro area. Most people have mortgages from a bank or credit union, but there are great benefits to borrowing from a family member instead.
When you borrow from a bank, you must pay the money back --- along with interest --- to the bank. The interest cost of a mortgage is very substantial. Over the lifetime of a $500,000 mortgage at 4.5% interest, the borrower will have paid more than $400,000 in interest. That is $400,000 sent to a bank never to be seen again. On the other hand, if the borrowers borrow the money from their family members, those interest payments stay in the family.
When you borrow from a bank, you must pay interest which delivers a profit to the bank. However, when you borrow from a family member, the rate you pay is likely to be much lower. For example, in January 2010, a 30-year commercial mortgage was likely to cost about 5.1%, but an intra-familial loan could be as low as about 2.5%. Over the lifetime of the loan, that can save the borrower more than $250,000 in interest payments.
When properly structured, the borrower is still permitted to claim the mortgage interest deduction, so that major governmental benefit is not lost.
For families with the wherewithal to make a sizable loan, an intrafamilial loan can provide enormous benefits.
Please note that this article is a general summary of law and omits many important details, footnotes, and caveats. It is no substitute for legal advice from a lawyer based on your particular circumstances. For more information or to speak with a lawyer, please call us at (301) 656-6905 or send us an email at email@example.com.