Many would argue that home ownership is an integral part of the American dream. Sadly, for Generation Y and millennials that dream has started to drift further and further out of reach. Due to rapidly rising home prices, the burden of student loans and low starting salaries, it has gotten a lot harder for many young people to own a home.
Can You Afford to Help Your Kids?
Other than paying for college, helping an adult child secure a home is the most talked about goal that my clients have for their children. How do you balance your desire to help them get into a house of their own, with your need to avoid taking on too much risk? Here are some considerations to help you decide if and how to help them:
Loan or gift? Are you offering to help with a down payment as a loan or as a gift? If your child puts down less than 20% of a home’s value as a down payment, lenders will probably charge primary mortgage insurance (PMI) until your child reaches that level of equity. Some parents want their child to avoid PMI by providing a loan for that amount, then having the child pay them back. But if it is a loan, make sure the child knows it and is financially able to pay you back (National Family Mortgage is a good tool for help with intra-family mortgage loans). See my blog post on “Lending to People You Love” for more advice on this often delicate topic.
Make sure they can afford all the costs: The true cost of home ownership goes far beyond the mortgage payment. The more expensive the house, the more expensive the property tax, maintenance and insurance payments often are as well. Make sure that your child knows what the true cost of ownership is, lest they take on a responsibility that they cannot handle.
Will they see lifestyle creep? Getting a nicer house than a child could afford on their own may come with other secret costs. If the house is in an area of affluence where everyone drives nice cars and sends their kids to private schools, will there be pressure for them to keep up with the Joneses?
Make sure you can afford it: People often want to help their kids, even if the cost to them is severe. Make sure that if you are gifting/lending money to a child you can afford to do so and that you are not jeopardizing your own retirement plan. A fee-only financial advisor can help you see what amount makes sense in your financial plan.
Home Ownership Isn’t to Be Taken Lightly
Home ownership is a big responsibility that no one should enter into lightly. I would consider helping a child with a home purchase only if you are convinced that they will stay in that home for at least five years and that they understand all the costs. Then, there is the wonderful possibility that your child will be eternally grateful, and your gift or loan will be truly appreciated.
