How Millennials can Still Build Equity Through Home Ownership
Financial experts have long touted that buying a home is a foundation for building long-term wealth. In fact, the younger a homeowner enters the housing market, the more potential he has for greater wealth over his lifetime.
However, fewer young adults today are buying houses than in the past. This puts a damper on the economy in a couple of ways. First of all, fewer home sales tend to lower new housing starts and accompanying construction jobs. Second, for young adults, this reduces their chances to build long-term home equity. In fact, many of today’s millennials missed out on the tremendous price increases (and equity explosion) from the low point of the housing market in 2007-08 to today’s market.
There are several reasons millennials aren’t buying homes. Low inventory in some areas has driven housing prices out of the range of some first-time homebuyers. Also, today’s young people are more content to continue renting, as it gives them better options for mobility and job switching. Unfortunately, rental fees have grown steadily over the last six years, averaging 20 percent higher than in 2010, which further hampers millennials’ ability to save for a down payment to buy a home.
Parents who would like to help their adult children get into the housing market may benefit in a couple of ways. One way is to loan children the money to buy a home, payable with interest. After all, with today’s mortgage rates above 3 percent and CD rates below 2 percent, parents and children could negotiate an interest rate that is beneficial to both parties. Note that gifts of more than $14,000 a year ($28,000 if gifted by a married couple) may incur a gift tax to be paid by the benefactor.
Another possible option is to buy the home of the child’s choice with cash and then turn around and sell it to him using “seller financing.” This may be something to consider if the young adult does not meet the eligibility requirements for a mortgage or lacks a down payment. With seller financing, the parent basically acts as the bank to which the child makes monthly mortgage payments, with interest, toward paying down the loan. The amount of credit is the agreed upon purchase price of the home minus any down payment. The mortgage/deed of trust is registered with the local public records authority. The parents can continue to hold the loan and receive ongoing payments to supplement their income, and/or eventually the child can apply to refinance the balance of the loan with a bank mortgage.
With seller financing, parents can help children begin building home equity at an early age, as long as the parent trusts the child will be able to continue making payments. However, even if the child was to default on payments, at least the home would not be foreclosed on by a bank. The parent can reclaim the property as an asset and decide whether to allow the child to live there until he can resume payments or simply resell the property, which may have built up substantial equity.
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