Hello, I’m planning to buy a house soon, and my family has offered to pay in cash to make the process easier. They would charge me an interest rate comparable to market rates, possibly as low as 5%. If the market rate is 6.8% or higher, are there any benefits to choosing a traditional mortgage from a bank, like tax incentives or other advantages?
I thought the ability to deduct mortgage interest might be a factor, but at my price point, the standard deduction would still be greater. Additionally, I’d need to handle property tax payments myself without an escrow account. Am I missing something? Thanks for any advice.
If you have a good relationship with your family and trust that this won’t create tension, the family option might be more cost-effective. If you’ve had issues with money and family before, then stick with the bank.
If you decide to go the family route, make sure to involve an attorney to draft a proper contract. Even then, be cautious—family loans can sometimes lead to misunderstandings. I’ve seen situations where someone couldn’t make a payment, and it caused major conflicts, or the lender needed a lump sum unexpectedly.
I loaned money to my daughter during the pandemic at a market rate of 4%. We didn’t even write up a formal contract, but it worked because we have a strong relationship. She made every payment, increased her payments every six months, and eventually sold the home, paid me back, and used the profit for a new down payment. It worked out great for us, but that kind of trust is key.
Consider working with a real estate attorney to set up a private mortgage. You may still be able to deduct the interest paid if it’s structured correctly.
Family loans can get tricky. Would your family allow you to refinance at a lower rate in the future if market rates drop? Also, in a competitive market, they could help you buy a house with cash, and then you refinance with a bank to pay them back. This approach can have some challenges, like dealing with paperwork and appraisals, but it might be worth considering.
If you can get a lower rate from your family, make sure everything is drawn up legally. You could save thousands in closing costs compared to using a bank. Your family member could benefit from earning interest on the loan, and if the relationship stays professional, this could be a win-win. Just ensure there are clear terms in the agreement to avoid future conflicts, like a payoff clause in case refinancing becomes necessary.
Even with a family loan, as long as it’s secured (meaning the house is collateral), you can still deduct the interest, just like with a bank loan. But if the standard deduction is more, that might not matter in your case.
I went with family help for my first home, and while there weren’t major issues, I noticed subtle comments about our spending habits and vacations. Eventually, we got a mortgage to avoid further complications. Money and family can create strange dynamics, even when intentions are good.
Vin said:
I think this is risky. Go with a bank instead.
It depends entirely on your family dynamic. Some families can keep things strictly professional and not let emotions interfere. If that’s the case, and you can get a better rate, then it might be worth it. But if emotions are likely to get involved, it’s better to stick with a bank.