The Bank of Mom and Dad
by Richard
Q. What’s the best way to knock off a bank?
A. Make sure it’s an inside job.
We are on the brink of a once-in-a-generation — maybe once in a lifetime — buyers’ market for single family homes, sometime between mid-2009 and the end of 2010.
The confluence of policy initiatives and bare-knuckle economics will make buying irresistible for first-time owners.
We still have a mountain of foreclosed properties coming through the pipeline, and Congress is dizzy with proposals to goad buyers into action. The existing $7,500 tax credit (well, interest-free loan actually) for new buyers will be vastly expanded in the bail-out, free-for-all, hog feeding frenzy now underway.
At some point, adult supervision will once again re-assert itself and fiscal discipline will be restored. Out of necessity….as inflation is re-ignited.
But not until the spending tab for this rescue binge has been run up just short of infinity.
We always act in haste and repent at leisure…but you’d be a fool not to scoop up a nice house at a bargain basement price.
There is a catch, and it’s a big one.
The lenders will want proof of income this time, as well as a down payment that may be far beyond what most young, first time home buyers may have.
Mom…Dad…if ever there was a time for you to help out, this is it.
But maybe not straight charity this time.
You could gift the money.
The annual tax free gift allowance increases to $13,000 in 2009. Double that if it’s a marital gift from each of you. Double it again if you gift it to your child’s spouse.
But many of you are still licking your wounds from the savage mauling the market gave you this year, and your generosity will be sorely tested.
The other option will still give your kids a break: You can lend them the down payment on very favorable terms.
First, you must become familiar with a term known as the Applicable Federal Rate, a nifty little number the IRS recalculates every month. The purpose is to prevent an intra-family gift disguised as a loan, as a means of circumventing the allowable tax free gift allowance.
If, for example, you loaned the money interest free, the IRS can argue that the money was gifted, as there is no reasonable relationship to an arm’s length loan to a non-family member.
The good news is that with all interest rates near historic lows, so also has the Applicable Federal Rate been scaled downward.
For December 2008, the allowable rate ranges from 1.36% for short term loans to $4.45% for long term loans.
Let’s assume you lend for the long term, so that they can piggyback the family loan behind the first mortgage. The feds seem determined to drive down the prime mortgage rate to the 4.5% to 5% range. Your rate still slightly undercuts the superior loan, giving the borrower a significant break.
This is a win-win all around.
The long bond (30 year treasury) hovers near 3%…a rate not seen in fifty years. Money market accounts now pay a puny 1%. Three month T-bills pay almost nothing.
This way, you earn a halfway decent return on your funds, while helping the next generation qualify for a loan that is tantalizingly out of reach.
As you know from the tenor of my prior posts, I’m not in support of a lifetime financial umbilical to your adult children, but this is a special case.
There are two critical pressure points where you can help launch your adultlets into financial independence. Helping them graduate from college debt free, and helping them scrounge up their down payment for their first home.
For any other big ticket item, make them wait until you are pushing up daisies.
