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Karen Telleen-Lawton: Things to Consider Before Helping Son with Down Payment

[One in a continuing series.]

Examining your finances takes fortitude. What are your goals and dreams? What can you afford? Here is another question modified from my financial advisory practice.

Dear Karen: Our son is gainfully employed and looking to buy a large house with a friend from college. They’ll operate a co-op, which is very popular in high-priced San Francisco. He has accumulated quite a bit for his age (31), but he still needs help with the down payment.

My husband and I read your response about loaning money to kids. By your measures, I think we’re ready to do it, though we don’t have enough for large gifts for both our kids. How do we think this through?

— Overwhelmed

Dear Overwhelmed: I have to start by assuming the most important consideration: that you can afford to loan or gift him this money. Your own retirement is paramount; you do your kids no favor if loaning them money now risks your becoming dependent on them later.

Given that, there are several ways for you to help him with his goal.

Invest with him in the house. This could be providing cash or co-signing the loan or both. Be listed on the deed. This involves you with your son and his friend in all decisions, for better and worse.

Sell investments and provide the money as a gift. You may want to change your estate planning documents to make it “even” with your daughter.

Home Equity Line of Credit (HELOC). You may still have access to one, even if you’ve paid off your mortgage. If so, you can take out a loan and formally loan him the money. This loan likely would reduce the amount of loan for which he can qualify.

Access a HELOC or a new loan and gift him the money. Since you presumably have better credit and a longer credit history, you would qualify for a larger loan at a lower rate. He would be under no obligation to repay, but he could choose to give you annual gifts. Again, you’d likely want to change your estate documents to reflect this. Consider that if he chooses not to give you annual gifts (or can’t — say he loses his job), you may need to sell investments to make your budget.

Overall, it sounds like the cash that he is requesting represents a nontrivial portion of your estate. If you choose to do this, you need to understand your son’s budget and verify for yourself that it is reasonable. He can find a pro-forma landlord business budget on the Internet, put together his numbers and show you how they work out. It should have, for instance:

» What percent occupancy is he assuming?

» PITI (principal, interest, taxes, insurance)

» Consider any special hazard insurance: earthquake, flood. Is it more or less affordable considering this is a business? If you don't get it and the house is destroyed, what happens?

» Umbrella insurance. This is relatively inexpensive and covers your liability on top of whatever insurance (auto, property) you have.

Finally, you will want to check with your accountant regarding possible effects on your taxes.

Although I’ve thrown a lot of wrenches in your son’s dream, I want to leave you with the bottom line that, approached with open eyes, loaning or gifting money is a good and appropriate way to share your blessings with your children.

— Karen Telleen-Lawton’s column is a mélange of observations spanning sustainability from the environment to finance, economics and justice issues. She is a fee-only financial advisor (www.DecisivePath.com) and a freelance writer (www.CanyonVoices.com). Click here to read previous columns. The opinions expressed are her own.

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