Multi-generation Mortgage Help
Among experts dealing with multi-generational wealth, one of the precepts is that each generation helps the next ones out. One way to do that – if certain issues are properly handled – is for the parents to help the kids or grand-kids when they buy a house.
House Buying Help
Whether you are just helping them with some advice or down payment money or doing more, one thing you want to show them is the how to check out what they can afford, what the various mortgage options are and what they can expect to pay in principal and interest each month.
With it you can play with the relationship of property value, how much money you need, how long you have to repay it and what interest rate you hope to get. It will tell you what your monthly payment will be and what the interest alone is.
The Family Bank
If your children or grandchildren don’t qualify for a favorable mortgage, or if you decide to provide more than advice or down payment support, the experts recommend the concept of a family bank.
James Hughes, author of “Family Wealth, Keeping It in the Family” and Mark Haynes Daniell, in “Strategy for the Wealthy Family” both advise readers to consider the idea of having a family bank.
Funds put into a family bank by the elder generation allow the money typically put aside in very conservative investments to be put to use by the younger generations while still providing current income to the elders. The younger generation in essence, is able to borrow from the elder generation.
Family Bank Issues
However, families need to understand and address issues that this situation can cause.
- Unless handled as a business transaction, borrowing money from relatives can be hazardous.
- The government, while allowing deductions for mortgage interest on mortgages supplied by private loans, has certain criteria that must be met – such as a competitive interest rate.
- Limited funds in the ‘family bank’ require that all affected family members determine the criteria for receiving loans from the bank, before any funds are loaned to anyone. The criteria should include what recourse the family has to a non-paying member.
- Younger family members often prefer to ‘do it themselves’ without help from the family – to prove that they are able and willing to take care of their own affairs.
If issues such as these can be worked out, the family bank concept can provide needed funds to next generations while providing needed income to the older generation.
If not, then using tools described above, home buyers can find the best mortgage for their situation.
Did you receive help from family when you bought your house?