Buying a home is not an easy thing to do these days. Not only are home prices up, but mortgages remain expensive to sign.
In December, the median existing home sold for $382,600, according to the National Association of Realtors. Meanwhile, mortgage lenders can charge PMI, or private mortgage insurance, when buyers don’t make a 20% down payment on a conventional loan. PMI protects lenders in case borrowers stop making payments, and it can be very expensive for borrowers.
But coming up with a 20% down payment on a sum like $382,600 means having to fork over around $76,000. And let’s face it — a lot of people can’t afford that. This especially applies to those who are still paying off an education and are grappling with the high cost of child care.
If you have a grown child who’s looking to buy a home but lacks funds for a down payment, you may be inclined to help out financially. And that’s certainly a nice thing to do. But before you go that route, make sure it won’t hurt your retirement, and that you won’t be setting your child up for failure.
Will helping with a home purchase hurt your nest egg?
Maybe you already have a $2 million IRA and you’re earning a robust salary that you expect to continue bringing home for several more years before your career wraps up. In that case, if you want to help a grown child with a home down payment, go ahead. You may even be able to help your child buy a home if you don’t have a couple of million dollars socked away, but you’re comfortable with your savings balance.
But one thing you definitely should not do is take money out of your retirement account to help a child with a home purchase. If you’re already 59 1/2, you can tap an IRA or 401(k) plan penalty-free. But if you remove a large chunk of money from your retirement savings, you’ll risk falling short once your career ends and you’re no longer earning a paycheck.
Secondly, if your retirement account needs a boost, then you should focus on pumping more money into your IRA or 401(k) before handing over down payment funds to a child. Your child can always put off homeownership for a few more years. But you may not be able to put off retirement since, unfortunately, companies have a way of forcing older workers out of their jobs, even though that’s technically illegal.
Also, you never know if health issues might make it so you can’t work as long as you’d like to. So if you’re behind on retirement savings in any way, then you should focus on building your nest egg rather than help a child of yours with a home purchase.
Don’t set your child up for disaster
Let’s say your child needs a one-time $15,000 or $20,000 gift to complete their home down payment. It’s one thing to give them that money and be done with it. It’s another thing to have to continuously provide financial support to your child so they can keep covering their homeownership costs.
Before you help with a down payment, make sure your grown child earns enough to cover their mortgage and homeownership costs on an ongoing basis. Unless you’re super wealthy and don’t mind helping your child out indefinitely, having to help with a down payment plus handing over a recurring $1,000 monthly check could put your finances at risk.
Many people are struggling to buy homes today. If you can help your grown kids reach that goal without hurting your own finances or compromising your retirement, great. But know that it’s okay to put your own needs first. Otherwise, come retirement, you might end up in a situation where you have no choice but to move into the home you helped your child buy because you can’t afford housing yourself.
