Helping the Kids Responsibly with Private Mortgages
Often a family member or child may need financial help. This may involve the purchase or renovation of a home or some other need. The person willing to may wish to help out but also wants to be repaid. A solution may be a Private Mortgage. This is where the parent loans the funds in a formal promissory note and uses a mortgage to secure payment. This arrangement can have the following benefits:
Lower financing cost for the children compared to a commercial note & mortgage
Higher rate of return for the parents compared to certificate of deposit
Security for the parents in the event of default
The son or daughter can avoid many of the costs of a commercial loan & mortgage, including:
A child with credit issues or unverifiable income may not qualify for a conventional loan
A Private Mortgage can protect the lender’s security from subsequent creditors’ liens
Parents can integrate the loan with their estate plan with debt forgiveness as part of the kid’s inheritance
If structured properly, the loan will not incur gift taxes
Flexibility, the note can provide for:
Interest only payments
Payment upon the occurrence of a certain event
What you will need:
Promissory Note or Line of Credit Note
One Time Mortgage Tax to County Treasurer (sliding scale from 0.02% to 0.1% of the principal)
One Time Mortgage Certification to County Treasurer Fee $5.00
One Time County Clerk Recording Fee ($13 for 1st page and $2 for each additional page)
(A $30,000 mortgage would cost about $55 in filing, certification and mortgage taxes.)
Expect about $500-700 for attorney’s preparation and review of documents.
Creation of a lender/borrower agreement may strain family relationships.
Foreclosure, if needed, can be expensive and damage family relationships
You must file IRS form 1098 and send a copy to the payer by January 31st of each year.
You must claim interest received as income.