PenPenWrites

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Holiday Gifts: Thinking outside the usual gift box.

11/17/2015

Thinking big this holiday season? Here's a really huge one: Gift your grown child the down payment on a house.

Too big a dent in your retirement reserves? You could loan them the money (toward a mortgage) at rates advantageous to you but better than they'd get at the bank. Or you could co-sign the mortgage so that they qualify for a loan where they might not otherwise.

Here are some key points to take into account on each option (with thanks to a NYTimes article):

Gifting money for a down payment: Some of us consider this a "here's your inheritance in advance" gift. If it's a recent gift, though, the borrowers–your kids–must prove the origin of the funds and provide a letter affirming that the money is a gift and does not need to be repaid.

Lending money: With current interest rates on CDs just over 1% and mortgage rates around 4%, you can loan your kids money at a lower rate than the bank and still earn more than a super-safe CD. It's a win-win, as they say, except that it isn't always comfortable to be the banker collecting a debt payment. Three initials of warning: IRS. A family loan needs to be at arm's length, meaning it follows the IRS's proscribed interest rates based on the terms of the loan.

Co-signing the mortgage: If your grown child isn't earning enough to qualify for a mortgage, your co-signature could bump them up into qualified. Some parents exercise this option so they can sleep better at night: It helps their kids live in a more stable or safer neighborhood than they might otherwise be able to afford. Co-signing may not cost the parent cash but it does figure on the debit side of their credit rating and could complicate refinancing or buying another home in the future. To say nothing of the drain on parental funds if grown child misses some mortgage payments.