By Brian Spinelli, CFP®, AIF®, Chair of Investment Committee/Senior Wealth Advisor
As housing prices have gone up in so many markets throughout the U.S., we’ve been approached with this question from clients more and more. Their adult children are getting out-bid on homes. They’re also facing the need for a larger down payment than what they had planned – and for many, they don’t have enough credit history to get a favorable mortgage rate.
The following is intended to share some ideas we’ve seen used in the last few years to help clients reach a solution. Before employing any of these, it would be prudent to speak with a mortgage professional to find out if any solution you’re considering could cause closing issues with the banks where they place mortgages. Another measure we recommend is to make sure you document the arrangements you make with your child. This helps with accountability; it also creates a paper trail for future reference – especially if you’re expecting any financial support to come back to you and be part of your estate.
Idea 1: Parents can utilize untapped home equity lines with low interest rates.
Here is one way we’ve seen this work. The parents draw down on their own home equity line of credit and then loan that money to their child for the down payment. The child then pays the monthly interest on the equity loan – along with, sometimes, extra principal depending on the agreement with the parents. The reason this strategy may work well for certain families is that the parents don’t want to draw down their investment portfolio and incur taxes. Further, they likely have a lot of equity tied up in their primary residence that they would like to see put to good use during a time of favorable interest rates.
Idea 2: Parents can use excess cash reserves they are comfortable gifting, or they may choose to pull money from their investment portfolio to help with the down payment.
In this case, we like to run projections to see how much a client can afford without jeopardizing their own retirement needs. In many cases, this strategy can provide a way to see the positive impacts of your legacy while alive, versus passing money down to your children after you are gone.
One client example comes to mind: We had done multiple iterations of their financial plan and were able to determine that $100,000 could be used by the parents to help buy their kid’s home without impacting their future needs. The clients did not expect to be paid back and did an outright gift to help with the down payment. Before doing this, they did check with their estate planning attorney to make sure they were not creating any future problems for themselves. Further, the mortgage broker working with their child also recommended that they cosign on the loan to make this go more smoothly with the bank.
Idea 3: Parents step into the role of the bank and treat this like a traditional mortgage.
This option typically comes up when a child may not have had enough time to create credit history and get an affordable loan. Some parents may not want to gift such a large sum outright; some may need to have a portion or all of the funds at a future date to support their own living expenses. In this kind of situation, we would suggest a formal agreement be drafted with an attorney with an agreed-upon payment schedule and interest rate. The idea here is the child would take title and be the owner of the property. Depending on the arrangement, the interest rate agreed to can be lower than what banks are offering, making this more affordable than a traditional mortgage.
These three ideas might be options for you to consider. They are in no way the only options available. We could even see creating a hybrid between two different approaches. As your advisors, we like to explore creative solutions that fit your goals and financial situation. Let us know if you’re weighing helping your kids with a home purchase or any other financial support – we’d be delighted to brainstorm solutions with you.
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Halbert Hargrove Global Advisors, LLC (“HH”) is an SEC registered investment adviser located in Long Beach, California. Registration does not imply a certain level of skill or training. Additional information about HH, including our registration status, fees, and services can be found at www.halberthargrove.com. This blog is provided for informational purposes only and should not be construed as personalized investment advice; it should not be construed as a solicitation to offer personal securities transactions or provide personalized investment advice. The views contained herein are not to be taken as an advice or recommendation to buy or sell any investment. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without previous notice. This material should not be relied upon by you in evaluating the merits of investing in any securities or products mentioned herein. In addition, the Investor should make an independent assessment of the legal, regulatory, tax, credit, and accounting and determine, together with their own professional advisers if any of the investments mentioned herein are suitable to their personal goals. Investors should ensure that they obtain all available relevant information before making any investment.