Can Helping Kids With A Down Payment Be A Bad Idea?

What with high student loan debt, late starts into the job market and relatively few high paying jobs, many Millennials are finding it difficult to come up with enough savings for a down payment on a home. According to ValueInsured, a company that provides sellers insurance to consumers if the value in their home fails, nearly 60% of all Millennials report they are not confident they can afford to buy a home.

And, one third of all Millennials say they rely upon a gift or loan from their family members in order to cover a key portion of a down payment for a home.

We hear many parents say, “…it’s my pleasure to be able to help my kids buy a house…” all the time. However, helping your kids buy by helping them with a down payment may be a pleasure but it may or may not be a good idea. Here are both sides of this “helping” equation…

It’s not a good idea to help your kids with a down payment when

1. You are a middle- income earner.
   1. If helping your kids with a down payment means “sacrificing contributions to your retirement accounts, it’s not a good idea…” says Jacob I. Milder, CFP with Oak Street Investments in Denver.
   2. “No, if it decreases contributions to your 401(k), 403(B), IRA,” says Milder.
2. You have to use a portion of your nest egg.
   1. According to Leslie Tayne, a debt resolution attorney, “many 401(k) plans will not allow continuing contributions until you have completely repaid the full amount borrowed…” from your next egg.
3. You are nearing retirement.
   1. “Parents who invest their money instead of giving it to their children could potentially leverage another 10% – 15% of comparative interest and market returns,” according to James Nichols, head of Advice and Retirement Income Strategy for Voya Financial Retirement Solutions.

It is a good idea to help your kids with a down payment when

1. The home is a good investment.
   1. If the parents plan on lending instead of gifting money for a down payment on a home, there’s a good possibility both the kids and the parents will get financial rewards.
   2. Parents can lend money at a cheaper rate than a bank and can perhaps get a greater return on that loan than from a fixed-income portfolio.
2. The child has a steady income source.
   1. Milder with Oak Street Investments says that “…if the child has a job with a strong earnings trajectory, consider lending the child money with an agreed upon repayment timetable.”