18 May How to Help Boomerang Children Finance a Home of their Own
Almost seven out of every ten Americans aged between 50 and 64 intend to downsize, according to the Conference Board’s 2012 Consumer Confidence Survey. But boomerang kids – adult offspring returning to live in the family home – prevent many baby boomers moving into a smaller home when they retire. With rising house prices and mortgage finance hard to come by, kids are finding it hard to step onto the property ladder without their parents’ help. So what options are there for parents with boomerang kids?
Cold, hard cash
The easiest way to help grown-up kids financially is by giving them cash to boost their down payment. Borrowers with high down payments – typically 20 percent or more – achieve lower interest rates and do not have to pay mortgage protection insurance. These benefits lower the monthly payment and may make the difference between your son or daughter securing an affordable loan, or being turned away by mortgage lenders. One word of caution: the cash handout must be a gift, not a loan. Mortgage lenders view a cash loan as a second mortgage against the property and will not lend where a second lien is in place.
Refinancing for equity release
If you are a parent of grow-up, kids there is a good chance you have a decent amount of equity in your home. If this is the case, then you may find that your existing mortgage deal is no longer the best deal in the market. Shop around. By moving to another provider who is offering a better rate it may be possible to draw some cash funds while retaining the same level of monthly payments and mortgage term. Because you have more equity and a longer credit history than your children you can borrow more cheaply than them. The extra cash can help your adult children buy a home of their own.
Buying and renting
If you have the cash for a down payment or can raise cash by remortgaging your home, it is worth buying a property and letting your adult children live in it. Set the rent at whatever your grown-up kids can afford; they can always sub-let the spare rooms for an additional income. Down the line your kids could buy you out or you could sell the property after a few years and gift the sale proceeds to your child to fund their own property purchase. Gifting money or property may have tax implications so do take tax advice at the time.
Guarantee the mortgage
Co-signing your child’s mortgage is a more conventional way of getting him in to a home of his own. By acting as guarantor for your adult child, you agree to pay the mortgage if your child cannot or does not pay. Co-signing a loan is a major financial commitment and does have risks attached. You may be fine to make your child’s mortgage payment now, but what if your financial circumstances change? Remember: the lender can sue you if your child does not pay. The lender does not even have to sue your child first. In fact, most lenders make co-signers the primary target as their credit is higher and they are more likely to repay the debt.
A little financial education goes a long way
In the words of Benjamin Franklin, “an investment in knowledge pays the best interest.” By helping your children put their finances in the best shape possible you give them a better chance of getting mortgage finance on their own. Begin by reviewing your child’s debt. If she has loans, are these at the lowest rate of interest? Is your child paying off her credit card balance in full each month? Next, encourage them to make a budget and stick to it. Look for ways to cut their expenses. Your child needs to build up a cash pile for a down payment. Even a little advice could do the trick. Mortgage lenders favor borrowers who are budget-savvy and know how to save.