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Tuesday, November 21, 2017

Ranking Bad Financial Decisions Parents Make To Help Their Millennial Children Buy A Home

What would YOU do for your adult children?  As a parent of an adult, you've already done your job, making sure your child stayed alive past the age of 18.  You've bought your kids pretty much everything they've ever needed, and still some of you have bought them almost everything they've ever wanted too!  When your child went off to college, you were there to help them with some of their costs.  Maybe you were "Parents of The Year" material and outright paid for your child's college education using money from a 529 savings plan?
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But it's never enough, is it?  Children will keep asking for money even after you've paid for some or all of their college expenses, first car, and even their wedding day!  A big mistake parents make is not front loading their kids with future financial "No's" while their kids are young.  Jessica, my wife, and I have already told our daughter who turned six yesterday by the way, that she is to pay for most of her college education.  Two of my daughter's younger aunts go to local universities (SDSU and Cal State San Marcos) and as a family we've visited them in the past.  So the concept of college is already in my daughter's head, and so is the idea that she'll have to save throughout her young life if she plans to attend someday.

No, we're not bad parents.  We just know that we'd rather let our daughter grapple with self-reliance.  As her parents, we may be able to pay for some of her college, and wouldn't hesitate to help her out a little.  What's a little?  Helping her with books, some of her tuition, and buying food.  We'd never agree to co-sign any loans, take out parent loans, or gift any monetary amounts that would jeopardize our retirement being fully funded.

WHAT'S MY POINT WITH ALL OF THIS?

Whether it's college or making a home purchase, more and more parents are making some bad financial decisions in the name of helping their children, especially millennials.  

A 2015 national poll done by GFK Custom Research North America found that 17% of parents of millennials expected to help them buy a home within the next five years.  This is an increase of 31% compared to 2010 poll results.

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Now, let's be clear on something.  Helping an offspring purchase their first home is not in and of itself a "bad" financial decision.  That's because there are many ways a parent can choose to help.  Some methods are innocuous.  Others are downright stupid, sorry...I call it as I see it.

Before I start to share the methods parents are using to help their millennial children buy a home, and ranking these from financially innocuous to simply foolhardy, let's talk home buying fever first.  Let's use for our setting, the Detroit metropolitan area.  Apparently, Wayne, Macomb, Livingston, St. Clair, and Lapeer counties are on fire these days.  Home prices are up 83% in August, compared to their 2011 lows.

Why is it that many people get even more desperate to buy their first home when it's a hot market?

They get outbid on one, maybe two homes, but instead of calling it quits, and waiting for a local or nationwide real estate market crash to be in a better position to buy, they instead resolve to buy a home no matter how overpriced it may happen to be.  Not smart, people.  Parents of millennials in the counties mentioned above: What are you doing?  Why would you agree to assist your children in buying an overpriced liability?  Most likely you got a sob story from your adult child, became emotional, and agreed to do some of the things below.  These are ranked from low (1) to high (10) on my Financially Dangerous Scale:

1.  Allowing your child to move back in after college.

2.  Letting your child and their significant other move back in with you.

3.  Helping to pay your child's other expenses, e.g., their car insurance, electricity bill, student loans, etc., once in a while.

4.  Paying your child's rent for a while or once in a while.

5.  Gift your kids money for the downpayment or closing costs.

6.  Loan your kids money for the downpayment or closing costs.  Of course, your child would need to report this money as a gift from you so it isn't counted as debt by the lender.  Loans between family are never a good idea.

7.  Taking out a home equity loan to raise the money to help your child pay for their down or closing costs.

8.  Co-sign the mortgage.  Guess who's credit will be ruined if your child can't pay the mortgage?  Or worse, stops paying and doesn't even tell you (because they didn't want to worry you) about it until the mortgage is three months late.

9.  Cashing in some of your retirement savings.  What, are you nuts?  Why would you liquidate from your 401(k) or IRAs to help junior with his house purchase?  You've lost compounding interest power with that move.  Will you have enough now to retire?

10.  Getting on the "Mortgage Merry-Go-Round."  You refinance your home and get enough cash out, $100K or more, to outright buy your child's desired home.  This makes your kid (really, you) an "all-cash buyer" and better in situations where bidding wars would ensue.  Once they close on their new (all paid for) home, your child takes out a mortgage on his new home and uses all that money to pay you back.

There are many reasons why #10 above is highly dangerous.  First, by refinancing, you've put yourself at the very beginning of a brand new 15 or 30-year mortgage.  This means your mortgage payment will be mostly interest and not principal once again.  "But my child is going to pay me back so I will put that lump sum back in and pay less interest."  Did you do your due diligence when buying the house all cash?  Meaning, did you have it appraised?  The bank will appraise the home before giving your son or daughter a mortgage.  What if the two amounts (what you paid and what the bank wants to finance) aren't the same?

Second, did you get a great interest rate on your own home when refinancing?  Even if you're able to put back all the money you squeezed out of your home from the refinance, are you now stuck at a higher interest rate?  Rates are increasing currently.  Although it may seem clever to do, the Mortgage Merry-Go-Round is a high risk move that could cost you dearly.

Conclusion

There's a lot of good intentions in the above 10 ways you can help your child purchase a home of their own.  If you're wealthy, you have nothing to worry about.  By all means, buy your child a home outright and tell them it's part of their inheritance.  Everyone else, however, has to be very careful how far to go when thinking of lending a hand to their adult child on any major financial decision, especially buying a home.  Parents, don't be scared to say, "No."  Tell your adult child that helping them with a home purchase will compromise your retirement.  Let them know you don't want to burden them in your old age.  Above all ask them:  If you don't have enough money for a downpayment yet, how can you hasten your savings or increase your income to raise the money you need?  Challenge your adult children!

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