Dear Dr. Don,
My aunt is loaning my husband and I the money to buy a house. The deed will be in my husband's name and my name. What are our options on loans to repay her?
-- Susan Stipulate
Thank you for writing Bankrate and asking this question, but the person you should be asking is your aunt. She's the one loaning you the money, and you should look toward what she requires as to the maturity, interest rate and payment schedule. If it's going to be an amortized loan, you can use Bankrate's Mortgage calculator to put together a payment schedule.
If she doesn't charge a rate of interest at least equal to the applicable federal rate, she is providing a gift of interest to you and your husband. She can do that if she wishes, but she needs to be aware of the potential gift-tax implications. The "Index of Applicable Federal Rates (AFR) Rulings" is released monthly by the Internal Revenue Service.
You didn't say how much of the purchase price your aunt is lending you, but I'm assuming she's the first mortgage lender on the property. If she's lending as a second mortgage, the first mortgage lender needs to be aware of the loan.
If I was advising your aunt instead of you, I'd tell her to get a real estate attorney to draft the loan documents and to insist on registering the mortgage as a lien against the property. A little professional tax advice wouldn't hurt either side. You'll want to be able to deduct the mortgage interest expense on your taxes, and for you to do that, the mortgage loan has to be secured by your personal residence.
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