Family member wants to lend us money to pay your mortgage interest rates reduced. Is it legal?

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Having a family member to another family member and let the credit crisis can not be considered a gift because it has a lower interest rate?

  1. Reply
    Jay S
    February 23, 2011 at 6:09 am

    who’s gonna know?

  2. Reply
    February 23, 2011 at 6:46 am


  3. Reply
    February 23, 2011 at 7:41 am

    A loan is not a gift. The interest you pay on the loan is income to the person who lent you the money.

    If the interest rate is below the rate you could get from other, non-related, lenders, then the difference in the the amount of interest you would pay is considered a gift, or income, depending on the terms of the loan. Get it all in writing so you can show that a reduced interest rate is intended as a gift. If you cannot, it will be considered “debt forgiveness,” which is taxable income.

    Any loan, even between family members, should be documented in a loan agreement with clearly identified interest rate, payment schedule, principle amount, and collateral (if any). This not only prevents any potential conflicts between you, it also comes into play in the event of one party’s death.

    For example:

    Your Aunt lends you $ 100,000 at 3%. The best you could get from a bank is 12%. This year you pay out $ 3,000 in interest to your Aunt. You would have paid $ 12,000 to a bank. The $ 9,000 savings is a gift from your Aunt to you.

    If your and your Aunt agreed on your loan at 12% interest and you only paid 3% and she told you that you don’t need to pay the higher interest, that is taxable income as debt forgiveness.

  4. Reply
    John F
    February 23, 2011 at 8:01 am

    yep id say so

  5. Reply
    February 23, 2011 at 8:36 am

    Have you considered the tax liabilities?

    And be sure to put EVERYTHING in writing, family or not. There’s not a lender on earth who would give out $ 10K without written assurance that the loan will be paid back. Require that the house be used as collateral.

  6. Reply
    oliver k
    February 23, 2011 at 9:01 am

    what youre asking for is a private loan, and yes its legal.

    But you will need to make sure all the paperwork is done right, including a promisory note secured with a mortgage/trustdeed, notarized and filed copies with the local land management offices, etc.

    basically it has to be done the legal way for it to be legal. otherwise where just talking about a gift of cash so you can pay your debts off.

  7. Reply
    February 23, 2011 at 9:05 am

    Sure they can. And if you and they are smart – you will have a promissory agreement drawn up outlining the rights/obligations of both parties. I’d pay an attorney to do it.

    Personally, I think its a bad idea to take a loan from a family member. If you really want to ruin a family relationship…..get money involved.

    If you need to re-fi go see a local mortgage broker and see what can be done.

  8. Reply
    February 23, 2011 at 9:36 am

    Sure it’s legal, but there a some things to consider.

    Pre-payment penalty. If your current mortgage has been in place less than 9 years, check to see if you will owe a pre-payment penalty on it.

    Tax implications: Unless your family bank provides you with documentation of your interest paid, you will not be able to deduct mortgage interest from your taxes.

    Disputes: You are going to have some rock solid document in place to state how this transaction is going to transpire. Nothing stops people from going to the reunions like money transactions gone wrong.

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