Call­ing on Mom and Dad

Baltimore Sun Sunday - - REAL ESTATE - By Carla Fried

Buy­ing a home is in­creas­ingly a multi­gen­er­a­tional fam­ily af­fair. Four in 10 par­ents re­cently sur­veyed said they ex­pect to help their chil­dren buy a home. That’s more than dou­ble the per­cent­age of par­ents who them­selves got help from their par­ents when they bought their first home.

Home prices that have been ris­ing faster than wages, com­bined with bur­den­some lev­els of stu­dent debt, are fuel­ing this trend. More­over, help­ing with home own­er­ship is a here-and­now as­sist that can trans­form a child’s fi­nan­cial life, rather than wait­ing to be­queath money down the line.

Whether you are the Bank of Mom and Dad or the adult child ea­ger to buy, a suc­cess­ful in­trafam­ily deal re­quires care­ful con­sid­er­a­tion of the var­i­ous op­tions:

OK, par­ents, it is hereby stip­u­lated that you, of course, want to help. Now the hard ques­tion: Can you cope with the long-term ram­i­fi­ca­tions?

A $10,000 gift you make at age 65 would be worth more than $26,000 at age 85 if it kept grow­ing at a 5% an­nu­al­ized rate. A $50,000 hous­ing stake to­day would be worth more than $130,000 at age 85. If you have any inkling you could use that ex­tra cush­ion in re­tire­ment, you prob­a­bly shouldn’t be gift­ing money to­day. You could con­sider mak­ing it a loan — more on this be­low — but also keep in mind that if you in­tend to pull the money out of a tra­di­tional 401(k) or IRA, you not only will owe taxes, but a large with­drawal could bump you into a higher tax bracket for the year.

Can you af­ford it? Got a boomerange­r at home?

Help them save for a down pay­ment. Ac­cord­ing to the Pew Re­search Cen­ter, about 15% of to­day’s mil­len­ni­als are liv­ing at home, nearly dou­ble the rate when their par­ents were in their 20s and 30s. Mak­ing it a fi­nan­cial free ride does noth­ing to help your child build adult­ing mus­cles. If they’re fo­cused on pay­ing off stu­dent loans, great. But if they have am­ple cash flow and want to even­tu­ally buy a home, now’s the time they should start to save. You should in­sist that they set up a sep­a­rate sav­ings ac­count and have au­to­matic monthly de­posits zapped into it from their check­ing ac­count. A $500 monthly con­tri­bu­tion is a down pay­ment fund of more than $6,000 in just one year. That can be more than enough to qual­ify for a low down pay­ment mort­gage in many re­gions of the United States.

Gifts are the eas­i­est and clean­est way to help fi­nance a home pur­chase. In

2019 any­one can give an­other in­di­vid­ual $15,000 with­out any tax im­pli­ca­tions. That means Mom can give $15,000 and Dad can give $15,000 to a child, and an­other com­bined $30,000 to a child’s spouse or significan­t other. (You can give more, but you will need to file a fed­eral gift tax re­turn. You won’t likely owe a

Gift vs. loan.

penny in tax as the first $11.4 mil­lion — in 2019 — is part of each in­di­vid­ual’s life­time es­tate tax ex­clu­sion. But you need to file the pa­per­work.) Grand­par­ents, aunts, un­cles and gen­er­ous friends are free to join in the gift­ing.

If your child will be ap­ply­ing for a mort­gage, you will need to sub­mit a let­ter ver­i­fy­ing that the money you con­trib­ute is a gift, not a loan. If the money you con­trib­ute will be a loan, a lender is go­ing to fac­tor it into the cal­cu­la­tion of your child’s debt-toin­come ra­tio. That’s not nec­es­sar­ily a deal-breaker, but some­thing to be aware of. And you def­i­nitely want a quick hud­dle with your tax pro to make sure you pass muster with IRS lend­ing rules. You will need to charge your kid in­ter­est. The IRS pub­lishes min­i­mum rates each month. The long-term rate for loans made in May 2019 was 2.74%.

If your fi­nances and credit score are in great shape, step­ping in as a cobor­rower on the loan will likely get your child a bet­ter mort­gage deal. Be­fore you take this step, you might want to check with a fi­nan­cial ad­viser who can walk you through the math and the con­se­quences.

Even if you ex­pect your kid to make all the pay­ments, in the eyes of the lender you are 100% on the hook as well. If some­thing were to hap­pen to your kid — a lay­off, an ill­ness — would you be able to eas­ily step in and cover the mort­gage, prop­erty tax and in­sur­ance? If you just hit pause when read­ing that, con­sider it a valu­able warn­ing.

If you do de­cide to co-sign a mort­gage, and your child is sin­gle,

Co-sign care­fully.

make sure your kid im­me­di­ately takes out a term life in­sur­ance pol­icy. In the event your child dies pre­ma­turely, the pro­ceeds from the death ben­e­fit can help cover mort­gage pay­ments and other hous­ing costs un­til you are ready to sell.

De­pend­ing on fam­ily dy­nam­ics, you might want to con­sider mov­ing with your kid into a home that can work for all of you. Fi­nan­cially, it can help ease every­one’s bur­den. Sure, it will take some ma­jor ad­just­ing for all par­ties, but be­fore you knock down the idea, con­sider the up­sides. Shared hous­ing costs. Built-in grand­par­ents for grand­chil­dren — po­ten­tially help­ing with some child care — and no wor­ries for how the adult chil­dren will be able to step in if needed to help care for an ag­ing par­ent.

Make a joint move.

HERO IM­AGES

Four in 10 par­ents re­cently sur­veyed said they ex­pect to help their chil­dren buy a home.

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