This is how I did my last home purchase. The attorney that drew up the papers also gave us a spreadsheet that shows the interest paid each year, as long as we stick to that payment schedule.
The IRS publishes an interest rate (each month? quarter?) based on duration of loan that you have to have to not be a gift, so we used that. So the reduction in interest is pretty cool ( I want to say it was 1.9% at the time, and the best quote I got from a bank was 2.9%), but also keeping the money in the family.
There's two things that I was wary of.
1. Involving my father in my finances in any way. I had a very long and very frank conversation with him about the limits of this deal. It's a structured debt/payback plan, and he's free to call a collections agency if I don't pay on time. He is not free to in any way shape or form comment on my spending or lifestyle in the context of "owing him money." One word and I dump the deal and go through a bank.
2. Taxes. The taxes end up working out the same, I just have to fill out a form for the interest paid, because dad doesn't really send me anything.
One thing that didn't work out that great, I had a hard time setting up an automatic deposit to another account with my bank. They are cool with sending a check through online bill pay, but that was an extra errand for dad every month. It probably took two months of arguing with the bank to get it set up, and of course, everytime we talked about it they were trying to convince me to get a mortgage through them instead. It is all set up now, and it is way more awesome to send that money to my parents every month instead of the bank.
My parents had both retired recently and were just sitting on a pile of uninvested cash. It was killing me seeing market returns upwards of 10% while they did nothing. But from their point of view, they had done well by not being in during the 08-09 debacle. I look at it like managing my own inheritance. It's a similar situation to me paying cash for my house, and then directing the parent portfolio, only I get to deduct mortgage interest at a higher rate than they have to pay taxes on.
I also only did this when I had enough assets to be able to buy out the mortgage if it ended up negatively affecting our relationship.
There were alot of savings at closing, I'm comfortable enough doing a home inspection on my own that I didn't have to pay for that, didn't have to worry about appraisal or anything else either. Got to skip the whole loan paperwork thing, but I did pull a copy of my credit report for dad to see.
The loan is all registered in the right places, everything is legit, all the benefits of a mortgage with none of the bank bullshit. No fee for waving escrow, and I was able to get reasonable insurance amounts for the house, not having to cover the full price of the note. It was quick too, I could get feedback from my lender within seconds as opposed to weeks. I would absolutely have missed out on my home if I'd been going through a bank.
One thing I didn't think about at the time, but my sister pointed out later, is that in the event of my parent's death, because of how they set up their will, I won't owe my sisters money, I'll owe it to my nieces and nephews.
Which is a scary thought. I don't know what it's like to owe a hundred thousand dollars to a 4 year old girl, but I imagine the terms could turn dictatorial with the quickness. Ice cream addendum. Dance-recital riders. Late fees on birthday presents. Notary public signatures required on tea party meeting minutes.