Home affordability is no longer affordable for most, especially for kids graduating from college. According to Zillow, the average home price is $293,349, up 15% from last year. In Austin, it’s $600,000. My daughter will graduate with her Master of Social Work degree next May, and she wants to buy a home in the Austin area, but home prices are skyrocketing. She regularly scans Zillow looking for bargains, but she is not finding many.
The low rate environment is helping fuel the housing boom, with mortgage rates below 3%. In 1981, they peaked at 18.5%! If you bought a $500,000 home in 1981, your mortgage payment was $7,739. Today it’s $2,081.
All interest rates are low, not just for mortgages. The yield on the 10-Year US Treasury Note is 1.30%, the one-month T-Bill rate is .06%, and your bank account is likely paying you zero percent. The current amount of savings deposits is $10.67 trillion, up 14.44% from last year, so there’s a lot of cash sitting on the sidelines earning close to nothing.
Low rates, rising home prices, and large cash balances are a perfect storm for helping your children buy their first home. Here is how it works. Your child wants to buy a $500,000 home, but they’re getting outbid because they can’t pay cash. If you have $500,000 in your savings account or invested in a low-yielding bond portfolio, consider using the proceeds to buy a home for your child. Once the home purchase closes, your children can pay you back in the form of a mortgage payment. If you charge them 3%, they’ll pay you $2,108 monthly, or $25,296 per year.[1]
If you follow this strategy, your cash flow will increase. For example, if you park your money in a bank savings account, the interest rate is probably .01%, so your annual interest payment will be $50 on a $500,000 balance. If you purchase a 10-Year T-Note at 1.30%, your annual income will be $6,500, far below $25,296!
Another benefit of this program is that you can eventually forgive the loan and transfer the home’s title to your children. The forgivable loan is not taxable to your children, and you remove the asset from your estate. Of course, you can make them pay you until the loan matures, and if you pass away before it comes due, they’ll continue to make payments to your estate.
National Family Mortgage® can assist you with the transaction, and they will help you manage the mortgage allowing your children to receive a tax deduction for their payments. Here is a link to their website: https://www.nationalfamilymortgage.com/
Owning a home is an American dream for most, but it’s slipping away because of the rapid rise in prices. Buying a home for your kid will give them an economic boost, build equity, avoid wasting money on rent, and get them out of your basement.
Happy house hunting!
If I were asked to name the chief benefit of the house, I should say: the house shelters daydreaming, the house protects the dreamer, the house allows one to dream in peace.” — Gaston Bachelard
July 15, 2021
Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.
Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.
[1] Payment based on a 30-year mortgage with a 3% interest rate.