Parents helping their
children invest in their first home is certainly
not a new idea. We see a variety of choices being
made in the marketplace. Some elect to co-sign on
the mortgage with the
children. It doesn’t cost Mom and Dad any money,
but it may help
the children qualify for a loan. Others either
give or lend money for the down payment. A few
even decide to put enough money to “buy down” the
mortgage interest rate, allowing for the rate to
be lower
in the first few years, making it easier to
qualify for the loan by lowering the monthly
payment.The
concept of equity sharing, although used by
builders and real estate investors, may also be
one of the best methods for helping
the kids buy a house. Shared equity allows the
children to feel less indebted than with an
outright loan, and at the same time gives parents
an added tax advantage.
An equity sharing
arrangement might work like this: The young
homebuyers purchase a home jointly with their
parents, they split
the down payment and ownership costs including
monthly payments, and the children rent the
parent’s share of the home. The benefits to the
young homebuyers include affording a larger home
for less money, having lower down payment and
ownership costs, ease of qualifying for the loan,
and the beginning of building an investment
portfolio. The benefits to the parents include
helping the children to afford a home, receipt of
rental income, financial and tax benefits,
increasing their investment portfolio, and having
a reliable tenant.
When the home is
sold, perhaps after a specified period of time,
the parents get back their initial investment, and
the additional proceeds are shared in proportion
to each one’s investment.
While shared
equity can be arranged between perfect strangers,
the beauty of this agreement is seeing a family
investing wisely together, with both parents and
their children gaining benefits they may not
otherwise obtain alone.
Both parties
should exercise due diligence by receiving counsel
from experts in the areas of accounting, financial
planning, and legal.
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