Could Your Home Equity Help Your Adult Child Get a Deed?

Hard to believe 30-year, fixed mortgage rates were under 3% six years ago. Today’s rates are well over 6%. And, according to new Census figures, home prices are averaging above a half-million dollars as we go to press. So if your adult child is struggling to save for a home, well… no wonder.

Meanwhile, perhaps you’ve owned your home for a while, and seen your home equity value rise considerably since you bought it. One way to offer your child a financial boost? Leverage your own deed to help your child acquire theirs. This way, your adult child could begin to build their own store of equity.

Could a Home Equity Line of Credit Be a Lifeline?

It’s OK to borrow against your home equity as a “second mortgage” before your own main mortgage is paid off. If you’re in the position to do it, taking out a line of credit could be just the ticket for the next generation.

This could make for a welcome inheritance, sped up to arrive just when it’s needed most. It could cover cash needs for a young person who’s trying not to buy anything on credit while awaiting a final mortgage approval. It could help cover closing costs, or even a down payment on your adult child’s future home.

Remember the Airline Adage About Putting on Your Own Mask First?

You’ll want to be sure to keep enough money on hand for your own needs. Can you handle a new line of credit on top of your regular mortgage and other monthly commitments, tax and insurance included?

First, be sure you won’t need a lifeline yourself. The famous airline guidance applies: Be sure to fasten your own mask, then help others. Your equity represents a safe and comfortable retirement. It secures your own housing stability.

A HELOC adds to your debt and that affects your own future financing options. This will be the case until you pay off the loan and the lien is released from the county records.

So, it’s best to borrow cautiously. Ask about fees, and potential penalties for early loan principal repayments.

And the effects of variable interest rates are also important to watch. It’s not unusual for a HELOC to start off with a low but temporary interest rate. Later, the interest rate can rise if and when bank rates go up. So, know the cap to the rate you can be charged. If the interest on your credit line shoots up, your debt could become harder to manage. Remember, your home is at stake in a HELOC.

What Other Forms of Home Equity Borrowing Could Meet the Moment?

A line of credit gives you a flexible way to borrow against equity. You draw what’s needed and no more. This allows you to use your equity in a way that’s responsive to your child’s particular needs as they unfold.

It’s not your only option, though.

There’s also cash-out refinancing, if a lump sum would be more helpful.

And there’s the home equity loan—another option that frees up a sum of money at once. It’s possible to get a fixed-rate home equity loan to fund loved ones’ needs.

Don’t expect tax deductions for the interest on your home equity borrowing. This is because the debt won’t be secured by the home being purchased.

Any Other Ideas to Consider Before Tapping Equity?

When you look at this as a matter of family wealth, borrowing against your equity could be considered unwise.

If your child could apply for a low-down-payment mortgage, their interest rate would likely be a percentage point or so less than that of a home equity line of credit.

You get the picture. In the sense of keeping more family money in your accounts and not giving it to banks, taking out a second mortgage is not always optimal.

Look to an FHA-backed loan as an example of financing that’s relatively forgiving with its rules. These loans can allow for buyers who put only 6-8% down on a home, and sometimes even lower.

You could always co-sign the paperwork for your child’s mortgage application. Or could you? Risk-averse mortgage companies often tell a loan co-signer that their name needs to go on the purchased home’s title. You’re best off having a legal agreement in place with your child to work out the details of your arrangement. But sit down and talk with your child’s mortgage consultant, and your own financial adviser, for situation-specific guidance before deciding to become a co-owner with your child.

Will Your Child’s Mortgage Lender Need a Gift Letter From You?  

First: Are you giving your child a gift, or lending the funds to them? You can make a loan to your child. You’ll need to have a written agreement on the terms and a promissory note created. The loan will impact your child’s debt-to-income ratio. Speak to your child’s mortgage consultant on whether and how to do it.

Underwriters normally prefer to see a gift, and no other loans, involved with the mortgages they issue.  If you’re offering a gift, then your child needs a gift letter for the lender. Be sure the specific funds are easily traceable. The child’s lender will want to see how the funds went from your account to the child’s, or to the closing table. The lender will need to be clear on the funds being a gift that you do not expect your child to repay. This is critical.

The mortgage consultant will let you know what your gift letter must contain. The lender will also need to see copies of bank statements as the funds are moved. If the funds you give to your child exceed $19K (per parent), then your federal tax return at the end of the year will need to include a gift tax form. Not that you’ll have to pay tax on the gift, even when you’re required to submit a form. You might be able to take the gift out of your lifetime exemption.  

Your child’s lender will need a gift letter If you’re offering a no-strings-attached gift. Read more about gift letters.  

We recommend consulting your accountant, a real estate attorney, or both. They will help guide you through your specific situation, point out pitfalls and alternatives, and ease the stress related to uncertainty. Best wishes to you and your child on the journey ahead.