As baby boomers, most of us are past the child-rearing points in our lives. Our children have grown, many have gone off to college, and a good number have gotten married and started careers. They are going off on their own, a bittersweet development that lessens your financial obligations but may easily cause you some sadness and nostalgia.
Due to the faltering economy, however, today’s younger adults (those in their twenties and early thirties) are less independent than previous generations. Many of them are underemployed and some are living with their parents. Others have their own place but receive financial assistance. In such a climate, it should come as little surprise that a growing number of baby boomer parents are helping finance their child’s mortgage. This is largely the result of high rates for first-time home buyers. Instead of paying 5% on a mortgage, a younger buyer can get his parents to take out a mortgage at, say, 3.5%. He can then pay them back at 4%.
This arrangement can be mutually beneficial to both parent and child. But is it right for your family? Here are a few considerations to keep in mind:
Is This An Appropriate Investment Vehicle?
Financing your child’s mortgage may be a good investment, especially for couples who are hesitant to invest in the stock market as they approach retirement. But such an investment can also greatly reduce the diversity of your portfolio and lock a substantial portion of your assets into a single house. On this note, if financing a mortgage is detrimental to your portfolio or your retirement planning, it may not be the right move to make. Make sure to talk with a financial consultant, such as one from Cavalry Portfolio Services, before you proceed.
Is There Any Chance That Your Child Defaults?
If there is any chance that your child fails to pay, you should absolutely refrain from entering into an agreement of this sort. Not only can a default create considerable family tensions, but it could also be economically crippling for you and your spouse. A bank can absorb a single default but you, in all likelihood, cannot.
How Much of A Difference Can You Make?
Some parents finance a mortgage simply to help their child save some money. Others do so because, without those savings, the son or daughter would not be able to afford a mortgage in the first place. Consider where your child falls on that spectrum. Is your help essential to their purchase of a home? Or is it merely beneficial? If the latter is the case, and if you find yourself expressing doubts, you may want to avoid making this investment altogether.
These are the three main considerations to keep in mind when deciding whether to help finance your child’s mortgage. Many parents instinctively want to help an adult child who is responsible, who can otherwise afford a house, and who hasn’t been dependent for years. While this is understandable, make sure that you don’t proceed without considering the potential ramifications.