08 Sep Should You Help Your Kids Buy a Home?
Above all else, parents want their children to be happy, and as home ownership has made many parents happy, they want to see their adult children happily in their own homes, no longer renting or living with the parents. However, for many young adults, it is difficult to find jobs that pay enough for them to save for and afford homes of their own without some financial support. With post-secondary education come student loans that can sometimes be overwhelming, home prices are on the increase in some areas of the country, and loans can be difficult to obtain.
One factor to consider in deciding whether or not to help children purchase a home is parenting philosophy. In the United States, many people have the belief that if people work hard, they can earn whatever they need in life. However, considering the changes in the economy and the housing market in specific, many parents are being led to a different opinion. Parents have seen the financial benefits and the satisfaction gained in home ownership, and they want the same for their children, but before making the decision to give their children money, they would be wise to consider just how they should go about doing that.
Stay off of the Limb
Financial experts advise that parents first think about how much they can part with, and don’t loan more than that. That sounds obvious, but as many parents of house hunting children are approaching or are in retirement, they would be wise to make sure they can meet their current needs and have enough to ensure comfort in retirement. It’s not a pleasant thought to consider, but parents need to include the prospect of never seeing loaned money again when making this decision.
Gift or loan?
If the financial assistance comes in the form of a gift, then parents know they will not see the money
again. It can be beneficial for their children’s future, however, as it does not add to any existing debt burden, and it may make it easier for them to get a mortgage. It is important, however, to learn how much it is possible to gift another person without running into gift taxes. Some recommend gifting children money over an extended period of time, partially to avoid gift tax, but doing so also allows money to sit in a bank account long enough to ensure a lender that it is not a loan.
Loaning children money can be done with no interest, a lower-than-market interest rate, or a market interest rate. It would be wise to draw up a repayment plan, or to specify that there is no specific repayment plan but that the parents have the right to call the loan at any time. This might help avoid a scenario where, in the case of a divorce, the soon-to-be ex-daughter- or son-in-law, ends up with half of the money you have invested in the house.
Child’s Financial Strength
It may be that the best way to help a child is to help them purchase a home, but parents must consider their children’s current and potential financial strength. Are they on a path of steady income for a long time? Or is it more likely that they may struggle? If they have to pay back a loan, will they be able to make their regular payments? If they have been gifted money for a down payment, will they be able to pay the bank the monthly mortgage payments? In some cases, it is clear that the children are responsible enough to manage repaying loans, but in other cases, it may be best to advise the children to continue renting or living at home if that is an option rather than buying real estate they cannot afford.
Whether or not to loan or give their children money is a decision that only parents can make, but it is important to consider all the angles and potential issues before committing.