Most of us know there is no place like home. This is never more true than when you graduate from college and you can’t find a job OR suddenly lose your job and finances become strapped. Who are you gonna call? Moreover, if you are a Millennial and want to buy your first home, the Bank of Mom and Dad may be your best first stop.
A 2015 Pew Research Center Report found that almost 2/3 of American parents help out their adult children financially. Ranging from paying for weddings, or divorces, or Grad School, parents are asked for angel funding from time to time. The irony is that, sometimes, keeping the money is exactly the best option for seniors on a fixed income so their children do not need to worry about helping them out in their final chapters. For parents over 70 the need to help out is balanced by fear and uncertainty, mostly along the lines of projected longevity and health issues. When parents can help out, they most often do.
The Return Of Investment (ROI) for seniors goes beyond dollars and cents, when it comes to their kids and grandkids. It becomes all about adding to their security and stability, along with assessing any personal risk factors, the fear of damaging your relationship with your child, and whether the funding is short term. Simply stated, funding the Fairy tale wedding or a new business start-up may not be as essential and rewarding as down payment assistance on the purchase of your offspring’s first forever home.
There is an increasing number of parents helping children and grandchildren with home purchases throughout the country. The recent increase in home values has grown the equity in parent’s homes exponentially. This gives parents both the resources and the opportunity to help their family members create stability (what parent wouldn’t like that?) and have a terrific investment over time. There are a number of ways parents can help their children and grandchildren.
The most important challenge for first-time or boomerang home buyers is saving for a down payment. If parents can afford it, this is the one great way to offer the kids a kick start. Institutional lenders have loan provisions for “gift funds” in many of their loan programs, principally because of this reason. Other ways include providing just part of the down payment, offering a loan (like a second), or being the main co-signer on a loan. Remember that Junior is still on the hook for 80% or more of the loan in most cases. What a great way to help Junior gain financial independence.
For most parents, opening the ATM of the Bank of Mom and Dad involves a good discussion between the principals along with advice from trusted advisers like your CPA or Financial Guru. It is probably better to have this discussion before a financial crises prompts it. It may be wise to prepare for this as a strategy and then be able to enjoy watching your offspring settled in their own nest. This is never more important than when the next generation starts arriving. Who knows…you may even move into the spare bedroom someday.