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A few years ago, the housing market was in a buying frenzy, with sales in high cost areas skyrocketing. Now, with the subprime mortgage crisis and an economic recession, sellers have flooded the market. As a result, housing is more affordable than ever. Is now the right time to invest in your child’s future with the purchase of a home?
Why Home Investments Help Your Child
A home is probably the largest asset you own, and although the value of the home may have decreased recently, the overall value is much better than renting. College debts, planning for retirement and investments are overwhelming for young professionals today. With that in mind, assisting your child with buying their first home means contributing to their financial future.
How To Help Your Child Become A Homeowner
The easiest way to help is by providing the down payment of a house. You act as the guarantor on the loan, while your child pays back all the monthly payments as opposed to paying rent. Those with enough cash can space out the payment as a gift, giving up to $12,000 a year without paying taxes. However, many lenders have gift restrictions, since they view it as a form of debt obligation that could interfere with mortgage payments. Get around this by giving your child the down payment prior to applying for a mortgage.
Parents with their own bills to pay can still help their child by cosigning a loan, which makes the lender feel more at ease knowing that someone else is also in charge of the mortgage. When real estate prices eventually go back up, you can sell the home and earn a profit, thereby getting your down payment back. Your child can get their share of equity to use on another home. Otherwise, he or she can continue living in the house, while you refinance the property to get paid back on your investment.
Looking Out For Your Child’s First Home And Yourself
If you are worried about your child not keeping up with his or her end of the bargain, ensure that he or she will have to move out and you can choose to rent the house or sell it. This is especially important for loan cosigners, since mortgage companies will go back to the parents, which could ultimately affect credit.
Set ground rules before entering any kind of agreement. Family is different from other business relationships, and while it may seem like a good idea to invest and help your child, he or she may not be financially suited for taking on the challenge of homeownership. Make sure everyone involved understand what is required in terms of payments and equity shares to prevent future misunderstandings.
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