Friday, May 3, 2013

Helping your Kids buy a Home



It is nice to help our kids buy a house. But it is equally important that we keep it “business.” If you loan them part of the downpayment or provide a loan to cover a gap in the financing, i.e. the kids come in with 20% down, take a 70% first mortgage and need 10% lent to them by the parents because the payments on an 80% first would be too much for their budget. The “Parental Second” can be creative. You can have the interest paid monthly or accrued to be paid annually. If you don’t have a payment plan and are letting the interest accrue, you can also compound the interest monthly or annually to increase your yield on the loan. Just remember that any interest earned, whether deferred or paid regularly, is regular income and subject to IRS taxation.

There is some bookkeeping to be done by Mom and Dad. The parents are required to provide their kids with a 1098 to document their interest paid so the kids may deduct the interest from their taxes.

For some parents, earning 3% or a bit more on your money is a pretty good deal considering how poor savings rates are today. Of course, your loan is in second position and, historically, loans in secondary positions usually have a greater interest rate than the first mortgage due to the greater risk accepted by the lender in second position. If a borrower defaults on the first mortgage, the holder of the second mortgage must make up the financial shortfalls on the first mortgage to make good his claim on the property. So asking for >4% is not unusual for a second mortgage. Many financial institutions are asking for prime plus one point on business loans. Wall Street Journal prime is 3.25% so, prime plus one is 4.25%. That might be a very satisfactory rate for a family loan. Let’s keep in mind, historic rates for home mortgages are up in the 5’s. Thus, 4.5% is still a pretty good deal.

Hmmmm, could a loan like this become part of your retirement income? If you are retired, this sort of thing can be helpful to your income. $40,000 at 4.5% generates about $150 a month in interest income. That's a nice supplement to someone's Social Security.

Of course, I suppose that each of us knows our kids and whether or not they would be a responsible adult and repay their loans; particularly loans from their parents! Let’s keep in mind that we need to go all the way and file a deed of trust and have your kids sign a promissory note that details how the loan is to be repaid. If you don’t do that, you deserve all that you are not repaid! The deed of trust protects your loan interest and your interest in the property. Without it, should you kids fail to pay, your ability to get repaid thru the trustee sale or foreclosure sale of the home will be compromised.

Emotional? Yes, there are a variety of ways for this to become an emotional mess. Is the parent depending on the interest from this loan to help with their retirement income? A missed payment in this case could be very critical. Suppose the son or daughter is involved in a large lay off? Even worse, their job is in low demand and finding a new job will take a lot of time. During this lay off, they stop paying their first mortgage. It is then the responsibility of the second mortgagor to make good the first mortgage to keep the first lender from filing foreclosure. Can all parents afford to pay this for their kids? That is a lot of stress and demonstrates for us the emotional issues that can come with lending to our kids. 

*   *   *

Our next financial education workshops will be presented at our main office on Chesbro Ave in San Jose. This month we are offering "Establishing Credit" on May 15th which is a good course for high school and college students, but really works well for anyone interested in how credit gets established. 

On the 22nd we will be offering "Preventing Identity Theft" at our main office. This workshop provides you with all you need to know to prevent identity thieves and protect your good name from those who would use it for criminal acts. Get ready for summer vacation with our preventing identity theft class. 

May 15th - Establishing Credit - 6:30pm 
Meriwest Credit Union Main Office at 5615 Chesbro Ave, San Jose CA 95123
RSVP with Greg Meyer at gmeyer@meriwest.com or call at 408-365-6328

May 22nd - Preventing Identity Theft -6:30pm

Meriwest Credit Union Main Office at 5615 Chesbro Ave, San Jose CA 95123
RSVP with Greg Meyer at gmeyer@meriwest.com or call at 408-365-6328
 

2 comments:

  1. here is my credits channel: https://www.youtube.com/user/CreditsChannel

    ReplyDelete
  2. Emily, I took a look at the videos you have on there. It is very good info for anyone looking for information on managing their personal credit. Thank you for sharing your video channel.

    ReplyDelete