My husband and I rent our second home to our son and his wife. Now we want him to own this house, but keep our 2.5% mortgage rate. How can we do that?

They were recent college graduates, and just starting their careers. They’ve made this house their home. And it’s been a wonderful arrangement where they cover all the costs, and have maintained and even improved the property.

But now, since they’re earning good money, they would like a home of their own. All four of us want to turn this rental agreement into a scenario where they own a house.

Because of the 2.5% rate, none of us are interested in selling the house and getting our rates jacked up to 7%.

We are considering keeping the mortgage under our name, and serve as the bank, and have our son pay all the expenses, and for the house to be his. This was the plan we had in our mind, and would be formalized in a written agreement.

When he decides to eventually sell, we’d get our down payment, expenses, and a bit of the equity back. They’d keep the rest.

Now the house has appreciated by approximately $50,000 at this point.

Here’s my question: Is this a bad idea? We know there must be tax implications, and other pitfalls, but we just can’t seem to figure this out.

Keeping it in the family

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Dear Keeping,

The plan makes sense to me. If your son pays all the expenses regularly for the house, including insurance and mortgage, while you act as a backstop, then I don’t foresee any big issues.

“Anyone can assist their parent or any other person in making a mortgage payment,” Melissa Cohn, regional vice president at William Raveis Mortgage, told MarketWatch.

But check if your mortgage is an assumable loan. If it’s an assumable loan, that means your son can buy your home by taking over your mortgage, Aaron Kovac, an Austin-based mortgage broker told MarketWatch.

But most conventional mortgages aren’t assumable, he added.

And also consider the tax implications. If your son is paying off your mortgage, it can be considered a gift for up to $17,000 in 2022, according to the Internal Revenue Service. And since spouses can give double, after $34,000, he will have to pay taxes on payments for that year.

But at the same time, there are drawbacks to your son paying off your mortgage.

While there’s no prohibition against doing so, he won’t get credit for making the payments. So he may want to consider that.

Plus, he also won’t be able to enjoy the tax benefits of making the payments, Cohn noted. In other words, he won’t be able to claim the mortgage-interest deduction on his tax return.

And finally, keep in mind that ultimately you will be responsible for the mortgage in your old age, regardless of your financial circumstances.

If you serve as the bank, and your son ends up not paying for some reason in the future, you’ll be the safety net, and you need to pay off the rest of the loan.

Imagine you’re in your 80s and this arrangement persists. If your son ends up in a situation where he’s not able to pay, you’re still on the hook since the loan is under your name.

And in that situation, you’re expected to cover him, in your old age, regardless of how big that monthly amount may be.

So talk to him about how he plans to resolve such a scenario when it comes up.

Overall, your plan seems to make sense, albeit with some drawbacks. 

But as Cohn puts it, considering how much higher rates are today, the benefit of losing a tax deduction in exchange for keeping a historically low mortgage rate is definitely clear. 

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