This week’s theme on the Retirement Quick Tips Podcast is: How Pre-Retiree Homeowners Can Benefit From Higher Interest Rates.

Today, I’m talking about a common goal that many parents have when it comes to their adult children - helping them buy their first house. My parents and my in laws both helped us with the down payment on our first home, and looking back, it was an incredible gift that I am very thankful for. Because of the help from our parents, we were able to put a meaningful amount of cash down and keep our mortgage payments very affordable. Then, 5 years later when we sold that house and moved to our current home, we had plenty of equity to transfer over and without that initial down payment, we wouldn’t have been able to buy our current home, that now houses our family of 6 + our dog.

One attractive option for parents looking to help their children buy their first home is an intra-family loan. Basically, the bank of mom or dad or both loans money to a child borrower for the purchase of a house. You have to follow a certain set of guidelines for the loan to qualify and not be deemed a gift instead, but if you do it right, it helps both you and your child in several ways:

• The interest costs paid by the child stay in the family (to be used by the parents)

• Origination and other transaction fees may be avoided; 

• And the biggest benefit in today’s market: the borrowing cost for the child is typically much lower than interest rates from the bank; the rates for these loans are set by AFR or applicable federal rates, which are currently 3.74% as of early March 2023. Compare that to the national average on a 30yr fixed mortgage right now, that recently topped 7% again.

Now obviously the risk of loaning to your child is real those payments could stop if they lose their job or something catastrophic happens, so the risk is higher than owning a diversified bond portfolio, but the interest rate paid to you as a lender is still better than what the parents can earn from a bond portfolio. 

Obviously, you need to have the assets to make an intra family loan pencil out, but if you do have the assets and your child is looking to buy a house, it’s a great strategy to consider with even more appeal when rates are higher. 

That’s it for today. Thanks for listening! My name is Ashley Micciche and this is the Retirement Quick Tips podcast.    

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Tags: retirement, investing, money, finance, financial planning, retirement planning, saving money, personal finance