Mortgage Killer Accelerator

Strategy 15 of 107

Family bank: a parent's loan at the IRS minimum rate

Most predictableFrom borrowing against another asset (moves the debt, does not erase it)

What it is

A parent lends cash (from savings, or from the parent's own home equity line) to pay down or pay off the child's mortgage.

Steps

  1. A parent lends cash (from savings, or from the parent's own home equity line) to pay down or pay off the child's mortgage.
  2. Write a real promissory note at or above the IRS applicable federal rate for the term. A loan below that rate can create imputed interest and gift-tax reporting for the parent (IRC §7872).
  3. Record the note as a mortgage on the child's home so the interest can qualify as home mortgage interest (IRS Pub. 936, secured debt).
  4. The child keeps paying the old monthly amount, now to the parent. At the family rate more of each payment goes to principal.

Repeat: Once per loan; a parent can relend as the balance falls. Re-check the IRS rate each month a new note is written.

Measure: Months to payoff at the old payment and the family note rate.

Try it in the calculator Enter its amount in "New rate, same payment". Add a payoff goal of 5 years to see what is still needed.

Risks

  • Money and family mix badly; write down what happens on a missed payment, a divorce or a death.
  • If the parent borrowed against their own home, the parent's home is at risk, and their line is often variable.
  • The parent's money is no longer available to the parent.

Who it fits

Average household, Newlyweds, Married couples, College students, Single, No high school diploma, No college degree, Grandmas and grandpas (62 and over)

Needs

Family willing and able to help

How predictable

Most predictable: once in place, the payoff date is arithmetic

A worked example (hypothetical, not guaranteed)

Picture a hypothetical household (average household). They owe $300,000 at 6.5% with 30 years left. The required payment is $1,896 a month, and that payment, which comes from income, never changes in this example.

They follow the steps: a parent lends cash (from savings, or from the parent's own home equity line) to pay down or pay off the child's mortgage.

Suppose it brings a new rate of 5.5% while they keep paying the old $1,896 payment. The loan would be paid off in 23 years 7 months instead of 30 years, saving about $147,106 in interest. To finish in five years, they would still need about $3,834 a month more from other strategies. That is why the five-year sequences stack several at once.

The amount above is chosen only to show the arithmetic. It is not an estimate of what this strategy will produce for anyone. Put real numbers from the fact finder into the calculator.

Sequences that use it

  • Family bank cycle: Annual gifts to principal, a recorded family note at the IRS rate for a lump sum, then a recast. The equity relay is left out of this cycle on purpose because it moves the debt rather than lowering it.

Sources and more information

Where to get help

Related strategies

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