Baby Boomers hold more than half of all U.S. household wealth, much of it tied up in home equity, retirement accounts, and cash. That adds up to trillions of dollars, and for younger generations struggling with home affordability, this is more than just an interesting statistic. It’s a potential pathway into homeownership. Families have been quietly creating what we might call “intra-family mortgages” for decades, and today the tools and rules make it easier than ever to set these up in a way that helps the borrower, benefits the lender, and keeps the IRS satisfied.
Why This Matters Right Now
Housing affordability remains one of the biggest barriers for Millennials and Gen Z. Rising interest rates, tight inventory, and stiff competition make it harder than ever to break in. Meanwhile, their parents and grandparents often have resources sitting in conservative investments earning modest returns. When structured properly, a loan from parent to child or granchild can unlock a home purchase, keep interest within the family, and even create estate planning advantages. It’s no wonder that more people are turning to this option, especially now that services exist to make the process easy, transparent, and compliant.
What Exactly Is an Intra-Family Mortgage?
An intra-family mortgage looks and feels like a regular mortgage: there’s a promissory note, a recorded deed of trust or mortgage, an interest rate, and a repayment schedule. The difference is that instead of paying interest to a bank, the borrower pays it to a relative. That money stays in the family, the borrower may get a lower rate than what’s available on the market, and the lender earns a return backed by real estate. The key requirement is to meet the IRS’s Applicable Federal Rate (AFR) standards, which set the minimum rate that must be charged for the loan to be recognized as legitimate and not as a disguised gift.
How Applicable Federal Rates Work
The IRS publishes AFRs every month. These rates vary by loan term: short-term (up to 3 years), mid-term (over 3 years up to 9), and long-term (over 9). As long as the family loan charges at least the AFR for its category, the IRS treats it as a proper loan. That means no imputed interest, no surprise gift tax issues, and no headaches later. The AFR is often lower than market mortgage rates, making it appealing for the borrower while still giving the lender a steady return. You can find current AFR tables directly on the IRS website.
Families also sometimes use the annual “blended rate” for demand loans, though for home purchases, term loans are more typical. The beauty of AFRs is flexibility. If market rates drop later, you can refinance the family loan into a new one at the lower AFR, just like you would with a bank, but without the big fees.
Common Ways Families Structure These Loans
There isn’t just one way to set up a family mortgage. Some parents provide the entire first mortgage and record a lien. Others provide a smaller second mortgage so their child can avoid private mortgage insurance. And sometimes the loan is just for the down payment, with parents using annual gift exclusions to help the borrower prepay principal. The combination of loan and gift can be powerful. For 2025, the annual exclusion amount is $19,000 per donor per recipient. That means two parents can gift a married couple child and spouse up to $76,000 each year, without touching the lifetime estate tax exemption.
Could you use a Helping Hand?
How Families Are Actually Doing This
In the past, parents might just write up a note on the kitchen table, or worse, treat the loan as an informal handshake. That approach creates problems: no recorded lien, no amortization schedule, no tax forms, and no way to prove to the IRS that this was a real loan. Today, companies like National Family Mortgage have stepped in. They prepare documents, record liens, set up amortization, and even partner with third-party servicers like FCI Lender Services to handle payment collection, reminders, and tax reporting. These services help keep family relationships smooth and give the IRS the paperwork it expects.
Key Tax Considerations
Taxes are always part of the equation. First, you must charge at least the AFR. That’s the bright line that separates a legitimate loan from a potential gift. Second, interest income must be reported by the lender. If you use a servicing company, they’ll issue Form 1099-INT to the lender and Form 1098 to the borrower, making it easier to deduct mortgage interest if the borrower itemizes. Third, think about how annual exclusion gifts might fit in. Parents can forgive part of the balance each year up to the exclusion limit, shrinking the loan balance without triggering gift tax filings beyond the annual Form 709 if needed. And finally, remember the lifetime estate tax exemption, which in 2025 is $13.99 million per person. That’s a lot of room for larger gifts or loan forgiveness if estate planning is part of the strategy.
Estate Planning Angles
One of the less obvious benefits of an intra-family loan is how it can shift future appreciation. If parents lend at the AFR and the child’s home grows in value beyond that, the excess appreciation accrues outside the parent’s estate. That’s known as a “freeze strategy,” and it can be useful when combined with other estate planning tools. Parents can also choose to forgive loan payments as annual gifts. If a lender passes away, the note itself is an asset of their estate, so it needs to be documented and inventoried properly. In some cases, families even use trusts as the lender or borrower to add asset protection or ensure repayment flows through a structured vehicle.
Protecting Both Sides
Money between relatives is sensitive. The key to preserving relationships is to treat the arrangement like a real mortgage. That means documenting everything, recording the lien with the county, and using a servicer to handle payments. It also means setting expectations about hardship, prepayment, or what happens if the home is sold early. Insurance is also important. The borrower should maintain homeowner’s insurance naming the lender as loss payee, and in many cases a life insurance policy equal to the loan balance can provide added peace of mind. These steps keep things professional, reduce the potential for conflict, and ensure the family loan works smoothly over the long run.
How to Set It Up
The process isn’t complicated, but it does require a few key steps. First, decide on the loan structure and look up the AFR for the month you’ll fund the loan. Next, draft a promissory note and record a deed of trust or mortgage with the county. Services like National Family Mortgage handle this paperwork for you. Third, set up third-party servicing so payments are collected automatically, statements go out, and tax forms are issued. Then fund the loan at closing, making sure escrow knows how to handle the family financing. From there, treat payments like you would with a bank loan, and revisit the arrangement each year to ensure it still fits your family’s needs.
Variations That Work Well
Some families prefer an interest-only period for the first couple of years, giving the borrower breathing room before amortization kicks in. Others like a balloon structure, expecting the borrower to refinance with a bank later. And second-lien loans are common when the goal is simply to avoid private mortgage insurance. Families sometimes build in an option to reprice the loan to a new AFR after a set period, giving flexibility without requiring a full refinance. The point is, these are flexible tools, and you can tailor them to what makes sense for your situation.
Who Should Avoid This?
This isn’t right for everyone. If the borrower can’t reasonably afford the payment without relying on constant gifts, it’s risky. If family relationships are already strained, adding money to the mix could make things worse. And if the lender doesn’t have the liquidity to part with the funds safely, it may not be wise to jeopardize retirement security. Other options—such as a down payment gift, co-signing, or simply waiting—might be better in those cases.
Common Questions
Can the child deduct the mortgage interest? Often yes, if the loan is properly recorded and secured by the home. What rate should you charge? At least the AFR for the term you choose, published monthly by the IRS. How do gifts play into this? Parents can make annual exclusion gifts to the borrower that can then be applied to prepay principal. What if rates fall? You can refinance the family loan into a new one, either with the family or with a bank. And do you really need servicing? Strictly speaking, no. But using a servicer keeps things professional and reduces awkward family conversations about money.
An Example
Suppose a buyer is purchasing a $1.2 million home with a $240,000 down payment. The parents provide the remaining $960,000 as a loan at the long-term AFR, which we’ll say is 4.5% for this example. That loan amortized over 30 years creates a monthly payment around $4,865. If the borrower went to a bank and paid 6.5%, the payment would be significantly higher. On top of that, the parents can make annual gifts of up to $76,000 to a married couple borrower, applying those gifts to principal each year. Over time, that combination of lower interest and principal reduction makes the family loan a powerful wealth-transfer tool.
The Bottom Line
Family money can open doors—literally. With trillions of dollars sitting in boomer bank accounts and home equity, intra-family loans represent a creative, compliant, and relationship-friendly way to help the next generation become homeowners. The IRS has provided a clear framework with AFRs and annual exclusions. Companies exist to take care of the paperwork and servicing. And estate planning professionals can help integrate these loans into a family’s broader strategy. The key is to treat the arrangement seriously, document it properly, and keep communication open. Done right, this can be one of the smartest and most rewarding ways to turn family wealth into family opportunity.
Resources
For more details, you can review the IRS AFR tables, check the IRS’s gift and estate FAQs, and explore providers like National Family Mortgage and FCI Lender Services. Many wealth management firms, including Fidelity, also publish primers on how intra-family loans fit into a broader financial plan.
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