An intrafamily loan lets parents lend their child money for a home at the IRS minimum rate, the applicable federal rate (AFR), instead of a bank’s mortgage rate. In October 2026, the long-term AFR was 5.22 percent, while Freddie Mac’s average 30-year mortgage rate was 7.40 percent in mid-October. On a $500,000 loan, that gap is worth about $710 a month to the child, and the interest stays in the family.
Done properly, it is one of the most effective ways a family can help a child buy a home. Done casually, it can create tax problems and family friction. Here is how to do it properly.
How a family loan works
The parents lend the money, the child signs a promissory note, and the child pays the parents back on a schedule, with interest. For a home, the loan is usually secured by a mortgage on the house, recorded with the county like any bank mortgage.
The loan can cover the whole purchase, or sit alongside a bank mortgage as a second loan. Either way, the key is that everyone treats it as a real loan.
The IRS minimum rate
The IRS publishes applicable federal rates every month. For a loan with a set repayment term, the rate depends on how long the loan runs, and the rate in effect in the month you make the loan stays locked for its life.
| Loan length | AFR for October 2026 (annual) |
|---|---|
| Up to 3 years | 4.25% |
| More than 3, up to 9 years | 4.61% |
| More than 9 years | 5.22% |
Source: IRS Revenue Ruling 2026-19. Rates change monthly, so check the current ruling before you sign.
What the savings look like
Here is a $500,000, 30-year loan, comparing the average bank rate in mid-October 2026 with the long-term AFR:
| Bank mortgage at 7.40% | Family loan at 5.22% | |
|---|---|---|
| Monthly principal and interest | About $3,462 | About $2,752 |
| Difference | About $710 a month, or $8,500 a year |
Over 30 years, that difference adds up to more than $250,000. The interest the child pays goes to the parents instead of a bank, where it is taxable income to them.
What happens if you charge less
Below-market loans between family members are covered by Internal Revenue Code section 7872. If you charge less than the AFR, the IRS can treat the interest you did not charge as a gift to your child, and as interest income to you that you never received. There are two narrow exceptions:
- $10,000 or less in total loans between you and the child is generally exempt, as long as the money is not used to buy income-producing assets.
- Up to $100,000 in total loans, the interest income you are treated as receiving is limited to the child’s net investment income, and is treated as zero if that income is $1,000 or less. This limit applies only to your income tax; the interest you did not charge can still count as a gift.
For most home purchases, the loan is larger than $100,000, so charging at least the AFR is the clean answer.
Forgiving payments along the way
Some parents plan to forgive part of the loan each year. Forgiving a debt is a gift. In 2026, each parent can give each child up to $19,000 a year without using any of their lifetime exemption, so a married couple can forgive up to $38,000 a year per child. Larger amounts require a gift tax return, but tax is rarely owed, because the lifetime exemption is $15 million per person in 2026.
One caution: if the plan from the start is to forgive every payment, the IRS may treat the whole loan as a gift on day one. Make real payments, keep records, and decide on forgiveness year by year with your accountant.
Recording the mortgage
To deduct the interest as home mortgage interest, the child’s loan must be secured by the home under a mortgage that is recorded or otherwise perfected under state law. IRS Publication 936 is explicit, and its own example shows an unrecorded mortgage losing the deduction. In Pennsylvania, that means recording the mortgage with the county Recorder of Deeds, the same way a bank does.
Recording also protects the parents. If the child sells, refinances, or faces a creditor, the family’s loan is on record.
Working with a bank mortgage too
If the family loan sits behind a bank mortgage as a second loan, the bank must know about it. Its payments count in the child’s debt-to-income ratio, and Fannie Mae has specific rules for how second mortgages are set up. Bring your lender in early so the structure works for both loans.
If the family can fund the whole purchase, the simplest version skips the bank entirely: the parents lend the full amount, record a first mortgage, and the child pays them directly.
A short checklist
- Decide the amount, the term, and the rate (at least the AFR for the month).
- Have an attorney prepare the promissory note and mortgage.
- Record the mortgage with the county.
- Set up automatic monthly payments and keep records.
- Report the interest on the parents’ tax return, and decide on any forgiveness with your accountant.
Where Karen fits
Karen Langsfeld is a REALTOR® and Pricing Strategy Advisor (P.S.A.) with Berkshire Hathaway HomeServices Fox & Roach. When a family loan is part of the purchase, she builds the offer and settlement date around it, so the attorney has time to prepare the note and mortgage and the title company can record the mortgage at closing. For more ways families help, see the guides to trust loans, gifting a down payment, and helping your children buy a home when mortgage rates are high, or learn more about helping your family buy or sell a home.
Contact Karen at (215) 495-2914 or through the contact page.
This guide is general information, not legal, tax, or lending advice. Confirm your plan with your attorney and accountant. Sources: IRS Revenue Ruling 2026-19; Internal Revenue Code section 7872; IRS Publication 936; IRS Revenue Procedure 2025-32; Freddie Mac Primary Mortgage Market Survey.