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Author: Dwdonhoff Big gold star, 5000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 127222  
Subject: Re: Mortgage: How much to help a kid? Date: 6/30/2006 10:23 PM
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Hi Jedi,

1.)Helping young ones start out. On one hand I feel it's good for them to live check to check while starting out and take lumps. On the other hand, what's the big deal with just gifting her with some down payment is a nice thing to do for family.

Maybe nice... or, maybe there are other "nicer" ways to be supportive without being handicapping (which I know is exactly what you are looking for!)


2.)Her house would be $460k. She can get 80% mortgage/15 % second/ 5% mortgage insurance. However,,,,the more we give her, the less interest she'll pay.
Is there advantage in helping her go from 5% down to say...10% down? Obviously the interest savings, but is it a wise financial move?


If they REALLY have no dough, here's what I suggest, in order;

A) Offer to establish for them an "Uncle Jedi emergency Line Of Credit Account." Set aside, say, $10,000 in a seperate checking account for them in their name. You can determine "real life" terms on the money if you wish... say, 5%-10% interest on the monthly outstanding balance... which you can choose to check on monthly, or quarterly, or annually... or just "forget to" from time to time if you prefer.

Let them know that a proper safety net is critical... and while you are neither handicapping them with a gift of safety cash, let alone a gift of house-spending cash... you WILL extend them "family credit" at far more leverage than the banks will. (OK, you can decide how far you want to extend the generosity in subsidized line limits, and subsidized interest. The thing is.... meter out the generosity in this case. Let them discover that you ARE offering more incrementally than they have access to in their own reality by themselves.)

If that's to timid & common-sensical for you... my next level suggestion;
B) Offer to lend them the 2nd lien for the home at what you consider a fair interest rate & terms. I suggest DO NOT make it a gift... make it a subsidized below-market (the market THEY would otherwise qualify for) loan.

I personally do not think the outright gift, in this scenario, is the best for their growth.

If first-timers with decent credit simply couldn't find zero down financing at all (as it was 20 years ago,) it may be a different story.... giving them a "leg up" with the strong family influence that they "pass it forward" to the next generation when they are in the position.

HOWEVER, the mortgage markets are SO flexible & lenient... I think outright gifting of a down payment sends the wrong message, and handicaps the kids... weakens their resolve to go out & get what it is they rightfully qualify for on their own.

Think about it... seriously. When you look back on your own life, you have great self-respect from the "insurmountable hurdles" you successfully mounted... but the generous "gifts" of support (while still remembered with appreciation) don't leave you particularly feeling like you are any stronger from the experience.

I know you won't think I'm being an overly hard-ass for these suggestions (though other may... LOL!) I admire that you are both in the position to support, and looking forward to the process.

Have a great Independence Day Weekend!
(How appropriate for this thread, huh?)

Cheers,
Dave Donhoff
Strategic Equity & Mortgage Planner
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