The Long Term Investor

Not good news for house hunters.

Mortgage rates rise above 7% for first time since May
Housing market remains stalled as mortgage rates continue to climb

https://www.foxbusiness.com/economy/mortgage-rates-january-16-2025

Bad news for buyers now that mortgage rates are back above 7%....although on a historic basis this is probably in the normal 5-7% range for mortgage rates.

I have been watching the...."Applicable Federal Rates" (AFRs)....every month. This is the minimum government mandated interest rates for private and other loans.....in order to avoid IMPUTED INTEREST. The long term AFR rate for February 2025 has been released and it is 4.75%. Of course most consumers can not get anywhere near this rate on a mortgage.

My kids mortgages are both family financed by the family banker....my sister. She holds both the mortgages on my kids houses. My sister benefits since these two mortgage loans produce a nice chunk of her retirement income. Since these are "family" loans they get a great rate and great terms. One of my kids loans was put in place back in July of 2024 since they moved to a new house.

Their initial......"AFR"..... rate on the loan was 4.46%. We were able to capture a NEW long term rate for their mortgage when the AFR dropped to a low of 4.03% in October 2024. We did this by revising and re-signing their mortgage note. I drafted a new note with the new rate set at 4.03%. This reduced their rate from about 4.46% to 4.03%.

I will continue to follow the AFR on a monthly basis and any time I can get them a good reduction on the rate I will redraft their note. My goal is to get them down to about 3.25% on their note....since that is the rate that my other kid has on their family held mortgage.

Incidentally....on these family held mortgages.....I do draft a legitimate note and deed of trust which are properly recorded.
We make sure we comply with anything necessary for the IRS. Doing these as family loans also gives us great flexibility in the payment terms of the loan.....especially the number of years.....for example a 40 year loan versus a 30 year loan.

We do make sure things are equal for both kids on their mortgage loans. My sister CHOOSES to GIFT BACK to my one kid....the difference between their payment at 4.03% and what it would be at the rate that my other kid has at 3.25%. She uses the annual gift tax exemption of $18,000 to do this legally. Of course she.....properly........uses the actual rate and payment....before the gift......for income taxes.

 

If you are curious about the AFR that I talk about above.....here you go.

https://www.irs.gov/applicable-federal-rates

Applicable Federal Rate (AFR): What It Is and How To Use It

https://www.investopedia.com/terms/a/applicablefederalrate.asp

"What Is the Applicable Federal Rate (AFR)?
The applicable federal rate (AFR) is the minimum interest rate that the Internal Revenue Service (IRS) allows for private loans. Each month the IRS publishes a set of interest rates that the agency considers the minimum market rate for loans. Any interest rate that is less than the AFR would have tax implications. The IRS publishes these rates in accordance with Section 1274(d) of the Internal Revenue Code.

Key Takeaways

• If the interest on a loan is lower than the applicable AFR, it may result in a taxable event for the parties involved.
• AFRs are used to determine the original issue discount, unstated interest, gift tax, and income tax consequences of below-market loans.
• Parties must use the AFR that is published by the IRS at the time when the lender initially makes the loan."

and

"If the lender charges interest at a lower rate than the proper AFR, the IRS may reassess the lender and add imputed interest to the income to reflect the AFR rather than the actual amount paid by the borrower. Also, if the loan is more than the annual gift tax exclusion, it may trigger a taxable event, and income taxes may be owed. Depending on the circumstances, the IRS may also assess penalties."

MY COMMENT

Personally.....I do consult with a CPA as to tax and other implications on any family loan that we do. I am able to do my own research and understand how it all works....but to be safe and make sure I am correct on my reading and understanding of the laws.....I do verify my opinion with a CPA when I am drafting the loan documents.

 

In our family.....we operate as a MINI-FAMILY-OFFICE.......very "mini"....compared to the "Family Offices" that are run by the very rich.. I personally handle the mortgage documents and finances, I handle most of the family investing accounts, and I handle most of the estate planing and documents. My sister is the family banker.

This works for us since we are a small family with myself, my wife, and my sister as the older generation and then my two kids and their spouses as the next generation. There are also three grand-kids. It would be much more complex if we were a larger family.

This works for us since my sister has no kids and considers my kids as hers. BUT......of course....every family and the family dynamics are different....so the bottom line is you have to do things the best way for YOUR own family. Just like in investing.....it is all about....."YOU"....and what is best for you and your family.

 

AND....I will say that I continue to stay busy with music projects. I am currently working with various people as to regular playing and shows.

I still have a couple of "production projects" that I keep putting off due to the cost that will be involved to get them done.....but I continue to slowly work on both. Both are LIVE CD projects......both for deceased National/International artists....one of whom I played and toured with.

They are both in raw form right now....but need me to invest in studio/engineering time for mixing and mastering. Hopefully I will get them both done this year.