Lots of young homebuyers seek financial help from parents when buying their first homes. In fact, according to a recent study, more than half of prospective homeowners under age 35 expect to get help from family or friends. And of those who have already bought a house? About half said it wouldn’t have been possible without a financial leg-up.
But getting help from mom and dad isn’t all sunshine and rainbows. Though it can definitely help further your home-buying goals, there are some serious drawbacks to consider, especially with the economy as it currently stands.
Are you considering tapping the Bank of Mom and Dad for your home purchase? Here are the pros and cons to think about.
It could help you buy sooner.
Home prices are rising, and as prices rise, so does the amount you need for a down payment. Getting help from your parents could help augment the savings you already have and speed up your home-buying timeline significantly.
It could lower your monthly payment.
The less the bank has to loan you, the lower your monthly payments will be. Another added benefit of having more to put down? It will usually mean lower mortgage rates, too. That’s even more savings — both monthly and in the long run.
It could help you avoid mortgage insurance.
If you’re able to put down enough cash, you might be able to avoid mortgage insurance, which adds an extra fee to your closing costs and monthly bill.
It might drain their savings.
If your parents have to drain their savings in order to help you, it’s probably not a good idea. Not only could it cause financial strain given the pandemic, but it also could pose a hazard should they have sudden medical bills or other expenses crop up.
It could delay their retirement.
If your parents are years away from retirement, it might not seem like a big deal for them to tap that 401(k) to help you out. But when they get to 65 and are forced to work four more years before taking it easy? You’ll probably feel pretty bad about it.
It could make things awkward.
Mixing money and family can be difficult. If you’re going to take money from your parents, make sure you’re absolutely clear on the expectations. Do you need to pay it back, or is it a gift? Will there be interest? When do they need it repaid by? Put all the details down in writing to ensure you’re all on the same page.
Another way parents can help
If you’re both willing, simply living with your parents for a short period of time can help you better afford a house. Just stow away the money you’d typically spend on rent, utilities and other services in a high-yield savings account (ideally for at least six months), and you should have a good amount of savings to help you on your way.
Don’t forget: You don’t need a ton of cash for a down payment. Though 20% is the most-talked-about number, the actual minimum down payment on many loans is just 3%. If you’re a military member or willing to buy in a more rural area, you might not need a down payment at all.