Cutting the financial cord with adult children can be a very hard thing to do, and most people put in this situation don’t have a good answer on how to make the situation better.
There are now three generations that find themselves providing some sort of financial aid to their adult children. The silent generation, the baby boomers and now Generation X have all managed to find themselves in similar situations. What started as lack of job market, generosity or by simply “helping out” as the generation prior had, these generations are offering loans, giving cash or paying bills to their adult children at record levels. It is no secret that unless these situations are managed properly, it can create a big hole in their finances, even jeopardizing their retirement. A July 2014 survey by the Boston nonprofit American Consumer Credit Counseling found that a higher proportion of U.S. households (1 in 3) provide financial assistance to adult children than support for elderly parents (1 in 5).
This is putting a huge wrench into retirement savings,” says Pamela Villarreal, a senior fellow with the National Center for Policy Analysis in Dallas. “The more boomers put out for adult kids, the less they can put aside for themselves.” As a result, some older adults are going back to work, reducing their own living expenses or even declaring bankruptcy.
What can help for parents who want to help out their adult children is to determine if the money that they are giving is going to fix the problem or merely delaying the inevitable. “Loaning money works well,’ says Kathleen Gurney, who runs the Financial Psychology Corporation, “If the process is objective and well planned.”
Here’s a look at three ways parents can financially assist their children in the area of home ownership:
Gifting a down payment. This allows a borrower to use money that has been gifted as a down payment. A married couple can each give $14,000 to a child and the child’s spouse, for a maximum of $56,000 in four separate gift checks.
Offering a family loan. Giving a loan to a family member is a winning combination, as the parents would get more interest from the loan then they would from a typical Certificate of Deposit, and the child would be able to get a lower interest rate then they would from a bank. Also a borrower whose offer is not contingent on obtaining financing could realistically offer the seller a quicker closing, which could be a huge advantage in such a competitive sellers’ market.
Cosigning the mortgage.If an adult child’s income is too low to qualify for a mortgage on the home they want, a parent can cosign on the mortgage. One thing to remember however, is that this will show up on your credit as an outstanding obligation, which could complicate matters if the cosigner wanted to refinance or buy another home.