The semiretired consultants took some of the money and invested in real estate. "Then we looked at our other cash and looked for income," Gail Boesel said. Because of low interest rates, she added, "there was no income to be had." So the couple did something unusual: They let their grown kids know that if they were interested in a parent-held mortgage that was a percentage point below market — at that time 3.5 percent — they'd provide it.
Two of their kids took them up on it. "For us, this was a no-brainer," Gail said.
A number of people seem to agree with the Boesels. According to the National Association of Realtors, one-third of first-time buyers received a gift or loan from their families to help buy a home in 2011. And there are times it makes sense.
Perhaps you're sitting on cash earning you next to nothing. Perhaps your offspring are earning enough to make monthly payments toward a house but don't have the credit (or down payment) necessary to qualify on their own. Or perhaps, like the Boesels, your kids have decent credit and already have a mortgage, but you can offer what is effectively a refinance, at better financial terms.
But that doesn't mean you should go into it without your eyes open. "Every family needs to assess whether this is the right type of investment decision for them," says Timothy Burke, CEO of National Family Mortgage, which specializes in these transactions. Here's what you need to know.
You don't have to go all in
Although some families have the ability to lend the full amount, most of Burke's customers are making down payment loans. "Many parents are making loans of about $50,000 to help their children qualify for mortgages from other lenders," he says. The key is to structure these loans properly. That means:
Obey IRS rules
If you want to do this for your children, you'll want to properly structure, document and register the transaction to be in compliance with the tax code. Although anyone can make an annual gift of up to $14,000 to any other individual, for loans of more than $10,000 the IRS mandates that the lender must earn interest at or above a rate set by the IRS — currently around 2.5 percent for loans of more than nine years. These rates change monthly and are generally around a point or point and a half below average.
In order for your children to claim the mortgage interest deduction, the mortgage must be registered. That's where companies like National Family Mortgage come into play, though real estate attorneys often do this work as well. They'll prepare a promissory or mortgage note that sets out the terms, interest rate, payment dates and frequency. These notes are legally binding.
Consider your other needs for the money
Assuming the legal hurdles sound manageable, there are a few other things to consider.
First, ask yourself whether you can afford it, says New York financial planner Gary Schatsky, founder of the firm ObjectiveAdvice. You need to be realistic about whether this is money you're going to need yourself. Had you earmarked it for retirement? Or would your kids otherwise inherit it anyway? If you had counted on this money for your later years, lending it to your kids is not the best idea.
Manage expectations — yours and your kids'
One big question to consider: "How are you going to feel sitting across the table at Thanksgiving from someone who owes you $100,000 and is not always timely with payments," says Colorado Springs, Colo.-based financial planner Linda Leitz.
That goes both ways, she adds.
If, as an adult child, you believe your parents are going to be second-guessing whether you should be going on a European trip, getting a housing loan from them may not be a very good idea. "A mortgage company isn't going to call you and tell you they don't like what you're spending on vacation."
Don't decide during a crisis
You need to think about it rationally. "The worst time to become your child's lender is in a crisis situation," Burke says. At that point, the child is often turning to the parent as a last resort. It's awkward and uncomfortable and there's a great temptation to just try to get it over with as quickly as possible. You risk neglecting both discussions and important paperwork — creating a recipe for disaster.
—With Arielle O'Shea
Jean Chatzky is the author of several books, including Money Rules.
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