(MONEY Magazine) -- Ken and Denise Holick had always intended to help their children buy homes. So when their daughter Katie, 26, told them she'd been apartment hunting for weeks in Columbus without turning up any good prospects, Ken threw out an idea: Why not buy?
To cement the deal, the Holicks stepped up with a $9,700 gift to cover a 3.5% down payment, FHA loan fees and closing costs on a $107,000 condo. Katie's monthly payment including condo fees is $886, about what she would have paid in rent.
"We figured now, when she'd have a reasonable chance of finding something she could afford, was the right time to help," says Ken.
With home prices and mortgage rates appealingly low and no-money-down loans nowhere to be found, more young adults are turning to family to get into their first home.
Over the past year, 36% of first-time buyers got help with their down payment from family or friends, typically parents, according to the National Association of Realtors, up from 28% the previous year.
If you want to give your child a leg up on a home purchase, first make sure you're on track to hit your retirement goals, says Scarsdale, N.Y. financial planner Jonathan Bergman. Then you'll need to figure out whether you want to give her the money, extend a loan, or cosign the mortgage. Use the guidelines below to help you decide.
How to do it: Today's tighter lending rules mean your child must be able to prove he's had the funds in the bank for at least 90 days before he applies for a loan. If you don't want to hand over the cash that early, be prepared to show that you've had the money in your account for at least 60 days.
The bank wants to make sure you didn't borrow on behalf of your child, says Bill Howe, a mortgage broker in Scottsdale. The bank will also require a letter stating that you don't expect the loan to be repaid.
How to do it: If your child needs only a few thousand dollars, your estate planning attorney can draw up a personal-loan agreement. Or use a lending website such as virginmoneyus.com (cost: $100 and up).
For a larger loan that would allow your kid to deduct the interest, get a formal mortgage (at least $300). You'll need to pay taxes on the interest you collect and charge at least the IRS's minimum rate, which changes monthly and runs from 0.35% to 3.35% today, depending on the length of the loan (go to irs.gov and search for "Applicable Federal Rates" -- you want to use the plain AFR rate).
No matter how you end up helping your child, keep in mind that your check doesn't entitle you to pop by Junior's abode unannounced whenever you feel like it.
|Overnight Avg Rate||Latest||Change||Last Week|
|30 yr fixed||3.88%||3.90%|
|15 yr fixed||3.04%||3.06%|
|30 yr refi||3.95%||3.96%|
|15 yr refi||3.09%||3.11%|
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