How a Private Home Loan Helps the Borrower

By turning to the bank of mom and dad, your favorite aunt or uncle, your in-laws, a brother or sister, or even your best friend or business colleague, you might gain the following:

•A lower interest rate. Borrowing from a relative or friend can mean a lower-interest loan than you'd be able to find elsewhere. That's because you and your private lender will set the rate. Because of their personal relationship with the borrower, most private lenders are willing to accept a low interest rate.

•Flexibility in paying back the money. Your loan repayment terms can be negotiated between you and your private lender. That flexibility can allow you to arrange a loan with an unusual repayment schedule at the outset -- such as interest-only payments for the first year -- or to later temporarily pause payments due to unforeseen circumstances. Just don't get cavalier about this, or you might strain the relationship.

•Federal tax deductions. Just as with a loan from a bank, private loans allow you to benefit from the federal tax deduction for home loan interest paid.

How a Private Home Loan Helps the Lender
Whether your private lender is a relative or a friend, he or she stands to gain in a number of ways, such as:

•Achieving a better rate of return. Even without paying as much interest as you would pay to a bank, you can probably offer higher interest than the person could get on current investments.

•Generating a steady income stream. Private mortgages are ordinarily repaid over time as opposed to in one lump sum (unless, of course, you sell your house, at which point you'd have to pay off the private mortgage in full). By setting up and following a repayment schedule, your payments can become a steady income stream for your family-or-friend lender.