The Short of It
Parents are increasingly setting up mortgage-like agreements with their adult kids who otherwise couldn't get into competitive real estate markets.
The New York Daily News recently reported on the rising trend of moms and dads becoming bankers essentially, so their grown children can purchase highly sought after real estate in New York City. But the parents aren't giving their kids—some of whom are struggling to "make it" and may not be able to get another loan—a free ride.
"They still get a good return on their money even as they give their kids a competitive rate. The kids are establishing a credit history and getting the same tax benefits they'd get with a regular bank mortgage," explained Julianne Bond from Compass real estate firm.
The mortgages aren't just verbal agreements either. In fact, official loan documents are actually registered with the county. Kids are expected to pay their monthly mortgage plus interest, which ranges from the same rate a bank would extend to a more family-friendly one.
New York is not the only city where local real estate experts point to an increase in parent-to-child mortgages. Young adults looking to buy in other cities where the real estate is tough to break into and cash is preferred are also appealing to mom and dad for help with a loan, instead of the bank.
"We've arranged $15 million in loans in just the first three weeks of the month. Last June, we did just $12 million for the whole month," Timothy Burke, CEO of Massachusetts based National Family Mortgage, told New York Daily News.
It's important to point out that parents who extend mortgages to their kids aren't always rich. In many cases, they're taking out loans from banks to make these deals happen. It's risky, especially since who is going to foreclose on their own kid?
Dr. Larry Curry talked to Fox 31 Denver TV about mom and dad mortgages and cautioned against enabling adult kids with these kinds of agreements. In other words, parents need to actually have them pay the loan back!
"Are you teaching? Are you helping? Are you enabling? Are you really encouraging your child to be independent?" Dr. Curry prompts parents to ask themselves these questions before extending a loan to a child. What they don't want to do is create an unnecessary dependency.
But in today's tough financial climate, mom and dad mortgages make sense for many families, and that's the key: it has to make sense for both the parents and the kid.
Dr. Curry further cautions that doing business with family can get sticky, so if you are considering a loan with a family member, think long and hard about whether it's the right choice before jumping in.
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