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When to help your adult child with a down payment

By: Tanisha A. Sykes, Special to USA TODAY

The nine-year stretch of rising stock prices won’t last forever. So now’s a good time for investors to bear-proof their 401(k)s before the next financial storm. USA TODAY


(Photo: Getty Images/iStockphoto)

More than one-third of Millennials looking to purchase their first home say they plan to rely on a loan or a gift from a relative to cover a key portion of their down payment, according to a recent survey.

And even if your own kids haven’t yet asked for a hand, many of them might be considering it. The “Modern Homebuyer” survey from ValueInsured, a company that sells insurance to consumers that pays back their down payments if the value of their home falls, indicates that nearly 60% of Millennials looking to buy their first home aren’t confident they can afford to do so.

So if your adult children could use some help buying their new digs, should you reach into your savings — retirement or otherwise — to help them out?

The answer, as usual, when it comes to issues of personal finance — is, well, personal. But here are some guidelines you can follow:

When It’s a Bad Idea…

If you are a middle-income earner. “A middle income earner, despite their best intentions, should not support their child’s purchase of a home if it means sacrificing contributions to their retirement,” says Jacob I. Milder, CFP, at Oak Street Investments in Denver. If opportunities still exist to contribute to a 401(k), 403(b), or IRA, loaning money would mean decrease these contributions, he says.

If you have to use your nest egg. Interest rates on 401(k) loans can be very appealing, but some experts say not so fast. “Many 401(k) plans will not let you continue to contribute money until you have repaid the full amount borrowed,” says debt resolution attorney Leslie Tayne.

If you are nearing retirement. “Parents who invest their money instead of giving it to the children could potentially leverage another 10 to 15 years of compounding interest and market returns,” says James Nichols, Head of Advice and Retirement Income Strategy for Voya Financial Retirement Solutions in Windsor, Conn.

When It’s a Good Idea…

If it’s a good investment. If you plan to lend the money instead of gifting it, you may reap some financial benefits. “Many of my clients feel that bonds will likely return very little if any returns for the next decade,” says T. Eric Reich, CFP and President of Reich Asset Management in Marmora, N.J. “You can lend money at a cheaper rate than banks and possibly get a greater return than you could expect in a fixed-income portfolio for the foreseeable future.”

If your child has a steady source of income. Make sure your child can afford all of the responsibilities of owning a home. “For instance, if your child has just completed graduate school or is already employed in a position that has a strong earnings trajectory, then consider a loan with an agreed upon timetable for repayment,” says  Milder.

John Reinmuth, 74, a retired pastor from Gig Harbor, Washington, and his late wife Jan, a former elementary school teacher who died in 2013, decided to help their son who works in  theater set construction and their daughter-in-law who works in a college admissions office with a the purchase of a house. The Reinmuths matched what the young couple could accumulate with a gift of $8,000, helping them to buy a starter home with a 10% down payment.

And In 2011, the Reinmuths gave a daughter and son-in-law $12.000 toward a down payment.  Added to their savings, the couple made a 20% down payment, eliminating the need for private mortgage insurance and got a better interest rate, Reinmuth says.

“Working with a certified financial professional, we learned that our pensions, Social Security, and IRAs provided a 98% likelihood that our retirement resources would not run out before we died,” Reinmuth says. “Thus, we felt comfortable helping our son and daughter-in-law to purchase a house.”


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