Make sure your costs should not exceed 30% of your income if you are thinking about buying your children a home. This strategy is for the homebuyers who are in the earning years. And when someone wants to purchase their first home in their early 20s or 30s, most likely they have resources from family. First, however, let’s discuss in detail how you can help your child while buying a home.
Strategies to buy your child new a home without impacting your retirement
Provide Loan Via Family Bank
To buy your adult child a home, there are mainly three general ways, these are:-
- Co-sign a Mortgage
- Provide an Intra Family Loan
- Money as a Gift
The most significant advantages created from the intra-family loan are from these three options above. A wealth strategist at RBC Wealth Management–U.S. Mr. Blake McKibbin mentions, “By making the applicable federal rate, usually, parents or grandparents make intra-family loans.” And the rate of the federal is set by the IRS as the minimum interest rate that can be charged to avoid any triggering gift taxes. The best part is that this option helps save thousand of dollars of interest since the rate is significantly below as per today’s rate.
Another best thing for the children is that when they take a loan from their parents or grandparents, this loan doesn’t have the same down payment as banks. Also, the requirements are not the same as loans from traditional lenders, credit checks, or mortgage insurance.
Furthermore, McKibbin also mentioned – that “by leveraging the annual gift tax exclusion, all of the loan or a portion of the payment can be forgiven.” He added – “And per year per family member should have the ability to forgive up to $16,000 in 2022. Besides, the ability to forgive the loan is up to $32,000 a year for married couples. Or if your spouse also chooses to give the $16,000 maximum amount per person, that’s a grand total of $64,000 that can be used to help purchase a home.”
Thus, it is very crucial for the intra-family loan to have proper documents to avoid any kind of tax or legal issues. For example, McKibbin says, to draft a promissory note, you should work with an attorney. Also, make sure you received the income report of your tax return so that you don’t need to run afoul of the IRS.
Another option is co-signing a mortgage loan is an option for parents who want to help children. This can improve the chances of being approved and their strength; remember this. Moreover, this option creates risks on the legal responsibility for the home that directly impact the parent’s credit score.
The Impact of Financial Assistance While Estate Planning or Retirement
Most parents have a dream of making a home for their children. But, as a parent, you should ensure the cost doesn’t come at the expense of your retirement planning.
O’Leary says – “You should build your wealth if it is essential for you to be able to offer that assistance which is very crucial. And this will help you plan for the future.”
An Intrafamily gift or loan can be acted as a form of arbitrage, which is pointed out by McKibbin. However, parents are able to help their children by providing financial support at below-market rates. And parents name the money under the child’s name this has a great potential to increase the value.
However, you can consult a financial advisor to determine which plan would be better for your financial situation. So, appoint a date with the advisor to communicate clearly with your financial advisor to protect your family bonding.