06/22/2023
With the current national average interest rates for 30-year and 15-year fixed-rate mortgages at 6.87% and 6.30% respectively, many reading this post will borrow from parents, siblings and family to purchase a home or finance other big ticket expenses. Or hard money loan from an acquaintance or other source.
Be very careful. And whatever you do, put it in writing.  if you don’t, there could be very negative consequences (that harm your family relationships, marriage, or peace of mind.)
Lending to family, adult children etc. or borrowing from family can lead to major relationship drama,and a messy breakup, i.e. separate property claims.
Here are some recommendations:
► Document the loan with a written promissory note and secure it with the borrower’s home if they want to be able to claim deductions for qualified residence interest expenses.
► if you are a married couple borrowing from parents or using premarital savings, consider signing a formal post nuptial agreement to avoid misunderstandings and drama, and most importantly to make sure there are no challenges upon divorce, including separate property and commingling claims .
► Make sure the borrower signs the note and that it includes details such as the interest rate, a schedule of interest and principal payments, and any security or collateral for the loan.
► Charge at least the Applicable Federal Rate (AFR) as interest. The IRS issues new AFRs for term loans every month. The rates for June 2023 are as follows:
𝐒𝐡𝐨𝐫𝐭-𝐭𝐞𝐫𝐦 𝐥𝐨𝐚𝐧 (3 years or less): 4.43%
𝐌𝐢𝐝-𝐭𝐞𝐫𝐦 𝐥𝐨𝐚𝐧 (over 3 years but not more than 9 years): 3.56%
𝐋𝐨𝐧𝐠-𝐭𝐞𝐫𝐦 𝐥𝐨𝐚𝐧 (over 9 years): 3.79%
► Pick up the interest paid as interest income on the lender’s tax return each year.
While the borrower still paying interest on the loan, it is usually at a lower rate than commercial lenders offer, and all the interest stays within the family instead of going to a bank or mortgage broker.
A winning situation for all. Thank you to my smart friend Lisa Niser for the financial and tax info. 
Wisselman Harounian Family Law
