Should You Finance Your Child's Mortgage?

Should You Finance Your Child's Mortgage?

More parents are helping their children these days by financing their mortgage. But is this a good idea?

An article in USA Today recently reported that there is a new trend in the mortgage industry. That trend is that many parents are financing the mortgage for their children. According to the article, family mortgages work well if your children are responsible and trustworthy.

Many parents are seeing that they can benefit themselves and their children by financing their mortgage. In the case of the Driscoll family, Dan Driscoll had his parents financed his mortgage in 1991. At the time, he could only qualify for a mortgage rate of 9 percent. His parents were only earning 3 percent on their savings. So they came to an agreement that Dan would pay his father a 6 percent interest rate if his father financed his $75,000 mortgage. These days, Dan is financing his son’s mortgage like his father did for him 20 years ago. As a result, his son is saving money on his interest rate, closing costs and other fees.

Having your parents finance your mortgage may work out in many situations. But how do you both come to an agreement and prevent that loan from coming between you? If you are a parent financing your child’s mortgage or if you are a home buyer looking for financial help from your parents, here are some things you should both keep in mind.

1.     Get everything in writing. More cases end up in court because of a misunderstanding. A person loans someone money and they both have different ideas of the repayment requirements. Even if it’s family, you should have everything in writing just so everybody understands the repayment requirements.

2.     Make sure you can afford it. If you are loaning money to your child or financing their mortgage, you should be in a financial situation where you can afford to take the loss if your child ends up not paying. If you are putting up your entire life savings to finance your child’s mortgage, you should probably reconsider.

3.     Communicate. The biggest thing you should remember is that communication is essential. If your child is married, make sure their spouse is included in the discussion and the decision. You and your spouse should also be in complete agreement. Discuss all the details of the agreement so everybody involved has a voice in the situation.

4.     Realize the precedent that you are setting. If you are going to finance the mortgage for one of your children, are you going to finance the mortgage for your other children? Will it cause bad feelings if you have children who already have a mortgage? As parents, you should consider the message you are sending to your other children if this happens.

5.     Don’t make it personal. Too often when parents loan money to children, the relationship is changed. Make an agreement to keep the business side of the relationship different from the personal side of the relationship and stick to it. This will help save a lot of fights, arguments and hard feelings.

If you are going to finance your child’s mortgage or if your parent is financing your mortgage, be sure it is the best thing to do. It can be a win-win situation, but it can also cause problems in the relationship if you’re not careful.

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