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Using Family Loans to Secure Better Home Loan Interest Rates

Written by Coach Janelle CPA on May 25, 2023

Here’s some information on how you can help a family member buy a home by making a loan to them while ensuring that you and the family member benefit from a tax-smart loan structure.

With the current national average interest rates for 30-year and 15-year fixed-rate mortgages at 6.81 percent and 6.13 percent, respectively, family loans can offer a much more attractive alternative. By charging the Applicable Federal Rate (AFR) as interest, you can give the borrower a good deal without giving yourself a tax headache.

The IRS issues new AFRs for term loans every month. The rates for April 2023 are as follows:

1. Short-term loan (three years or less): 4.86 percent
2. Mid-term loan (over three years but not more than nine years): 4.15 percent
3. Long-term loan (over nine years): 4.02 percent
 
Charging at least the AFR for a term loan to a family member allows you to avoid federal income tax and federal gift tax complications.

But if you charge less than the AFR, you may need to navigate some tax complications. Two tax-law exceptions, the $10,000 and $100,000 loopholes, can help you avoid these complications, although they may not be suitable for all home loans.

It is crucial to document the loan with a written promissory note and secure it with the borrower’s home for them to claim deductions for qualified residence interest expenses. Make sure the borrower signs the note and that the note includes details such as the interest rate, a schedule of interest and principal payments, and any security or collateral for the loan.

In conclusion, family loans can provide homebuyers with better interest rates than commercial lenders offer, especially if family members charge the AFR. Remember to consider the loan terms and tax consequences when structuring the loan.

Ready to Optimize Your Finances? Discover Coach Janelle CPA's Expert Services Today! 

Looking for professional guidance in tax planning and virtual CFO services? Look no further! Coach Janelle CPA is here to help you unlock your financial potential and achieve your goals. 

Take advantage of Coach Janelle's expertise and experience in tax planning and virtual CFO services to:

Navigate Complex Tax Laws: Maximize your tax benefits and minimize liabilities with personalized tax planning strategies tailored to your unique circumstances.

Optimize Wealth Management: Gain insights from a virtual CFO who will guide you in making informed financial decisions that align with your long-term goals.


Unlock Financial Potential: Embrace ongoing support and guidance, ensuring you stay ahead of the game and make the most of your financial opportunities.

Don't miss out on the chance to transform your financial future! Contact Coach Janelle CPA today to schedule a consultation and take the first step towards financial empowerment. 

About Coach Janelle CPA

My passion is to help 6 & 7- figure+ earners see their financial possibilities through financial literacy and strategy. 

I want to help you save on taxes so you can keep more of your money to live the life you dream of and have worked for NOW, and build wealth and equity for the next generation.

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