Borrow From a Family Trust

Family mortgages give borrowers an edge and lenders a healthy return.

Last year, when Joe and Jacqui Polaneczky decided to make an offer on a condo in Chicago’s Lincoln Park neighborhood, they didn’t call a bank or credit union. Instead, they turned to the Bank of Polaneczky, borrowing money from a family trust set up by Jacqui’s grandmother.

The couple’s interest rate is slightly lower than rates for bank-financed mortgages, and the trust is earning a higher return than it would get from a bank CD or money market fund, Joe says. The deal also enabled the Polaneczkys to make a cash offer for the condo. That gave the couple an advantage over other buyers interested in the property.

For a one-time fee of $725, National Family Mortgage, a service that facilitates intra-family loans, handled the details. That included drawing up the promissory note, recording the deed and making sure the arrangement passed IRS muster so the couple can deduct the interest they pay and the trust doesn’t run afoul of gift-tax rules.

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The average interest rate on NFM family mortgages is 3.27%. Joe says he liked the idea of keeping the money in the family. That sentiment is shared by many parents who are confident their children have the wherewithal to repay the loan, says NFM chief executive Timothy Burke. “They come to the conclusion, Why should they pay the bank when they could pay me?”

Sandra Block
Senior Editor, Kiplinger's Personal Finance

Block joined Kiplinger in June 2012 from USA Today, where she was a reporter and personal finance columnist for more than 15 years. Prior to that, she worked for the Akron Beacon-Journal and Dow Jones Newswires. In 1993, she was a Knight-Bagehot fellow in economics and business journalism at the Columbia University Graduate School of Journalism. She has a BA in communications from Bethany College in Bethany, W.Va.