Help pack a million meals for struggling seniors on 9-11. Volunteer today

Should You Give Your Kids a Mortgage?

The pros — and cons — of lending money to your children

Woman holding a house key. Should you give your kids a mortgage?

Although some families have the ability to lend the full amount, most are making down payment loans to their children. — Alamy

En español | A few years ago, uncomfortable with volatility in the stock market, Maryland couple Gail and David Boesel decided to liquidate a sizable share of their portfolio.

The semiretired consultants took some of the money and invested in real estate. "Then we looked at our other cash and looked for income," Gail Boesel said. Because of low interest rates, she added, "there was no income to be had." So the couple did something unusual: They let their grown kids know that if they were interested in a parent-held mortgage that was a percentage point below market — at that time 3.5 percent — they'd provide it.

Two of their kids took them up on it. "For us, this was a no-brainer," Gail said.

A number of people seem to agree with the Boesels. According to the National Association of Realtors, one-third of first-time buyers received a gift or loan from their families to help buy a home in 2011. And there are times it makes sense.

Perhaps you're sitting on cash earning you next to nothing. Perhaps your offspring are earning enough to make monthly payments toward a house but don't have the credit (or down payment) necessary to qualify on their own. Or perhaps, like the Boesels, your kids have decent credit and already have a mortgage, but you can offer what is effectively a refinance, at better financial terms.

But that doesn't mean you should go into it without your eyes open. "Every family needs to assess whether this is the right type of investment decision for them," says Timothy Burke, CEO of National Family Mortgage, which specializes in these transactions. Here's what you need to know.

You don't have to go all in

Although some families have the ability to lend the full amount, most of Burke's customers are making down payment loans. "Many parents are making loans of about $50,000 to help their children qualify for mortgages from other lenders," he says. The key is to structure these loans properly. That means:

Obey IRS rules

If you want to do this for your children, you'll want to properly structure, document and register the transaction to be in compliance with the tax code. Although anyone can make an annual gift of up to $14,000 to any other individual, for loans of more than $10,000 the IRS mandates that the lender must earn interest at or above a rate set by the IRS — currently around 2.5 percent for loans of more than nine years. These rates change monthly and are generally around a point or point and a half below average.

In order for your children to claim the mortgage interest deduction, the mortgage must be registered. That's where companies like National Family Mortgage come into play, though real estate attorneys often do this work as well. They'll prepare a promissory or mortgage note that sets out the terms, interest rate, payment dates and frequency. These notes are legally binding.

Next page: Is this money you're going to need yourself? »

Topic Alerts

You can get weekly email alerts on the topics below. Just click “Follow.”

Manage Alerts


Please wait...

progress bar, please wait

Tell Us WhatYou Think

Please leave your comment below.


The Cheap Life

Jeff Yeager Cheap Life Ultimate Cheapskate AARP YouTube web series save money

Catch the latest episode of The Cheap Life starring Jeff Yeager, AARP's Ultimate Cheapskate. Watch

Discounts & Benefits

From companies that meet the high standards of service and quality set by AARP.

Member Benefits HomeServe

Members can protect their homes with comprehensive repair plans from HomeServe.

AARP Credit card from Chase

Members can get cash back rewards on purchases with the AARP® Credit Card from Chase.

Woman holding smartphone in city, Google map tool

Members can find discounts on the go via the AARP® Member Advantages Offer Finder app.

Member Benefits

Join or renew today! AARP members receive exclusive member benefits & affect social change.

Rewards for Good

Your Points Balance:

Learn More

Earn points for completing free online activities designed to enrich your life.

Find more ways to earn points

Redeem your points to save on merchandise, travel, and more.

Find more ways to redeem points


Advance your skills. Transform your career.

Explore your learning possibilities.