My son wants to buy a house. Can I loan him money at the short-term AFR (applicable federal rates) if I loan him the money for 3 years? Currently it is about 0.69%. Also, can I make it so he pays me only interest for the 3 years and at the end of the term he would pay a balloon payment of the original loan amount? Also, can I just type up a loan agreement that we would both sign? I don't want the irs to think its a gift because its not. I just want to help my son with this purchase and for the two of us not get slammed with tax debt. I do realize I would have to pay taxes on the interest he pays me.

No, I would suggest you lend him the money at the prevailing market rate of interest and not at the AFR. In this manner, the IRS would not come back to you and say that you have lent your son money at below fair market value. The IRS would then assess tax on the additional income (difference between fair market value of interest versus the AFR rate) along with the applicable interest and penalties.

Yes, you can make an agreement, where you can require your son to pay you only interest for the 3 years and at the end of the term he would pay a balloon payment of the original loan amount.

Yes, you can type up an agreement that both of you could sign as long as the agreement covers essential language and specifically states the following;

a)an interest rate,

b)amount borrowed, &

c)terms of the repayment.

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