Rayan is COO/CFO at Fraction and advises several startups. Previously, Rayan was COO/CFO at Unison and ran a major Canadian pension fund.
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In today’s market, it’s not uncommon for homebuyers to receive assistance from their parents. The numbers are staggering. A survey from Legal and General found (download required) 43% of homebuyers under 35 received assistance from their parents or other family members. In aggregate, in 2018, parents or other family members provided assistance to purchase $317 billion of property across the U.S. The assistance can range from partial to full help with a down payment up to purchasing a home outright.
Rising housing costs necessitate this assistance — in whatever form. In a city like Denver where the median household income is just over $60,000 and the median home price is around $470,000, a 20% down payment could be as much as $95,000 for a home in the middle zone of prices. A down payment of that size can take a very long time to build up with a median income for the area. This problem is magnified in places like San Francisco, Los Angeles, New York, Boston and Washington, D.C. Often down payment assistance is not needed just to get to 20%, but to get to an affordable monthly payment. This is in part due to how significant the gap can be between the available budget for monthly house payments and debt service costs.
This problem is not going away, and neither is parents’ desire to give their children as solid a footing as they can. Given this, it is important for parents and family members to consider the best ways to provide support for children while at the same time ensuring a safe and stable retirement for themselves. It is important to keep in mind that many conventional mortgage products limit the amount of down payment that can come in the form of a gift, but there are often exceptions for money that comes from parents.
Retirement And Savings Accounts
There are a number of options at parents’ disposal, but without ready access to large sums of cash, those looking to provide assistance should look at their primary assets, such as your home and savings in 401(k)s or other savings accounts. Taking money from retirement accounts or unrestricted savings does require you to lose cash today that would otherwise provide compounding returns for the future. This may be an option if the money provided for the purchase of the home is intended to be repaid — and you can put it back into accounts on a monthly basis. There may also be fees associated with withdrawing from certain accounts.
Your Own Home
The house is a natural place to look for funding to help children. Real estate markets in many of the places where the income-to-home-price ratio are the biggest have been very healthy. The increased equity parents have enjoyed has often come at the expense of unaffordability for their children. In this context, it is important to consider how comfortable you may be taking equity out that could otherwise be used for retirement or any emergencies your children experience.
Taking Advantage Of Equity
After discussing with a financial advisor, if you believe that you would like to help your children with the equity in your home, make sure you consider all options. One option is a conventional HELOC or, if your home is fully paid, a regular amortizing mortgage. It’s important to consider that you will have monthly payments and your monthly cash flow will be reduced as a result. If you do not want to reduce monthly cash flow, then you can consider products such as appreciation mortgages, home co-investments and reverse mortgages. All of these products offer no monthly payments but differ in their term and eventual costs.
The right product will be determined by your own set of circumstances. The benefit of using such products for down payment assistance is that no monthly payments means that your lifestyle is not impacted, and the main utility for you — being able to live and age in your home — is preserved. The factor to consider is whether you are comfortable taking on debt — albeit with no monthly payments in the case of an appreciation mortgage, reverse mortgage or a home co-investment. With appreciation mortgages and home co-investments, you can take equity out of your own home to help your children purchase their home or reduce their monthly payments.
When evaluating what is right for you, consider what value you derive from your home. If its value is that it provides a place to live and enjoy, then it makes sense to use its equity for other purposes — like helping adult children better meet the high home prices in the real estate market. Similarly, if the equity you earned was always intended to help your children, then this is a way to do it today, rather than wait. There are risks with all financial products, and understanding each one is key to making any decision.
If you are looking to help your children with a down payment for a home and lack a large savings account or other liquid assets, relying on your home’s equity may be an option. The best part is a multitude of options available once you’ve decided to rely on home equity. There’s a good chance one will work for your unique situation.
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