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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 had a secure job and impeccable financial habits, so I considered 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 paid 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 earned 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. How did our private mortgage work out? All went well through nine years—until, in 2024, I forgave the loan for estate-planning reasons.
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Jonathon,
Thanks so much for all you do and have done over the years, I have told many friends and family members about you and your personal finance articles over the years and you have helped us immensely.
I read with interest your last article on Saturday where you mentioned you did a private mortgage for your daughter. Thanks to you and Clark Howard, I am in position to do the same for my daughter who is getting married soon. Did you do it for just your daughter for a reason or perhaps she wasn’t married at the time. Wondering if I should do this private mortgage in just her name or in both my daughter’s and her new husband once she is married. Just wanted to see if there is a big downside to either one.
thanks again.
My daughter was single at the time. She subsequently married and, because her husband thereafter paid half the mortgage, I think it would be hard for her to argue — should she ever get divorced — that the house is solely hers. Thus, while I’m not a divorce lawyer, I’m not sure making the loan solely to your daughter would make much difference.
Thanks again Jonathan, makes sense to me!
Perhaps I was more bold having been a commercial banker comfortable with documentation, so I printed online docs used by FNMA (FannieMae) when I made a loan to a child. I then walked them to the county’s land record’s office for recording. I also printed out the amortization schedule which we both use for my income and her expense. Very easy.
Jonathan, we’re thinking of doing the same for our daughter who’s struggling with the now current +7.5% mortgage rates. Are you still using National Family Mortgage and do you have any comments on their service? Thanks, Roger
Yes, my private mortgage for my daughter is still in place, and it’s worked out very well. National Family Mortgage originated the loan, and the servicing has since been handled by another company. That servicing company means it’s all very formal and arm’s length. Hannah makes the payment, it turns up in my bank account some days later, and we almost never discuss the loan. I know family loans are a contentious topic and many have turned sour. But if you’re confident your daughter has good financial habits, it strikes me as worth exploring.