With house prices being as high as they've ever been, many potential first-time homeowners are finding it hard to come up with the money for down payments. As a result, many parents are now stepping to assist their children in coming up with the money for the down payment. However, there are certain downsides to doing this that you should consider even as you help your child pick through homes for sale.
Refinancing is Risky
Some parents choose to refinance their houses so as to help their kids to come up with the down payment. The risk in this is that in case anything happens that brings down the value of your home, you'll have to come up with the money to cover the equity you took out. Therefore, making the assumption that your house is worth a certain amount and will remain so or improve over time is risky.
Selling Stocks and Mutual Funds Can Incur Heavy Taxes
When selling stocks or mutual funds you have to remember that there are taxes that you might be charged. These may include income tax or capital gains tax depending on how long you've held onto the stocks. Having to pay all these taxes plus any other administrative charges can seriously reduce the amount of money you get back from your investment.
Additionally, you might be selling at the wrong time i.e. just when the stock price is starting to rise or when the price is below what you bought the stocks for.
There is a Gift Tax
It may seem strange but cash gifts above a certain value will trigger a gift tax. This means that on top of the money given as down payment, you may also have to come up with additional funds to cover the tax. However, there are ways prevent this e.g. by gifting the money to the couple rather than to the individual child. However, there is still a limit although this will give you more wiggle room.
It Can Result in Scrutiny of Your Finances
There are laws in place to ensure that cash gifts being passed between relatives don't come from illegal sources such as drug dealing or terrorism. Therefore, if a parent gifts a certain amount of money to their child for down payment, the mortgage lender may ask for additional documents. These are usually bank statements of the person gifting the down payment.
You Can Help Them Make the Right Decision
In addition to financial support, you can lend your child some of your caution and wisdom before they make a purchase. Help them get a mortgage survey and a thorough home inspection on the property so that they can most thoroughly evaluate the offer. Visit a site like http://www.communitysciences.com for more help.