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Ed Johnson
Ed Johnson, HR & Business Operations Consultant
Category: Finance
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Experience:  Central Michigan University, MSA Candidate; Global Compensation Operations Mngr; AA Degree Lib Arts
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When calculating the minimum interest that can be applied to

Resolved Question:

When calculating the minimum interest that can be applied to a loan intended for the purchase of a residence, does one choose the regular AFR, or the Adjusted AFR, and what is the difference? I am about to receive a loan from a family member, who wants to charge me 2% interest, and was told by a different lender that 4.61% is the current minimum. Can we not write up the mortgage at 2.15% as a mid-term loan?
Submitted: 5 years ago.
Category: Finance
Expert:  Ed Johnson replied 5 years ago.

DearCustomer

 

I can not speak to precisely whay the mortgage person would off you that figure of 4.61 at the current rate, except that minimum can fluctuate day to day.

 

The IRS AFR is a different figure than the one used by the commercial lender who follows the interbank rates. However he may have been quaoting from the AFR as well, because 4.61 is close to the AFR rate listed in the March and April publications. Most mortgages are considered long term.

 

The IRS holds you to the minimum interest listed in the monthly AFR. That publication changes evey month.

 

Go by the AFR Rate for your loan period and compounding frequency.

 

this is the table you should be using If you close on the loan in:

 

MARCH http://www.irs.gov/pub/irs-drop/rr-09-08.pdf

APRIL: http://www.irs.gov/pub/irs-drop/rr-09-10.pdf

 

Mid term are loans of 3 but not more than 9 years.

 

long term are loans of more than 9 years.

 

You select the table you will be using, (if less than 250,000 table one) and then select the AFR. To the left of the AFR is a figure tha says 110% etc of the AFR. You multiple the AFR by that percentage to get the actual interest to charge.

 

 

 

 

Customer: replied 5 years ago.
Hi Edward,

Thanks for your response and the IRS resource. I am still a little unclear: You said "if less than 250,000 table one," however the loan amount is for more than $250,000 by a little more than double. In that case, which table do I use? Also, do we have to charge some percentage more than the minimum AFR (the 110%), and if so, how do we know which percentage to choose for the actual interest to charge?

And finally, if we decide to do a mid term loan to take advantage of the lower AFR, would that red-flag us with the IRS or could it come back to bite us in the ass, since most mortgages tend to be long term?

Thanks again - we are closing in a few days, and we were surprised to learn of all of these road blocks. My parents have given plenty of loans to others in the past, but they are in Canada, where the laws are different.


Expert:  Ed Johnson replied 5 years ago.

Dear Frustrated,

 

Ok let me make this easy for you.

 

use table 1 (because this is the classification of your loan and purpose)

 

us in the long term section, under the compouding column you choose for your loan instrumet. (you can pick, etc. I recommend monthly, but you may choose annual, etc.)

 

Use the top line only, NOT the ones with the percentages. the line across the top that says AFR with no precentage. (this will meet the requirements of the IRS)

 

The commercial lender would use a diffent table and lines. Forget what I said about the 250,000 loan.

 

If you write a note for a 9 year or less note, you can choose the lower midterm rate, and it will not raise a flag. If it did, the IRS would want to see the note, and as long as the note was for a 9 year loan, then it would be ok.

 

Ed Johnson, HR & Business Operations Consultant
Category: Finance
Satisfied Customers: 10760
Experience: Central Michigan University, MSA Candidate; Global Compensation Operations Mngr; AA Degree Lib Arts
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