My 2-year-old is learning to ride a scooter. I live at the top of a very steep hill. It’s a dangerous combo. The other day, she started to pick up a lot of speed. I had to make a split-second decision to either pull her off or let her go and risk a fall (more on this later).
It’s a similar consideration in the conversation I have with many clients who are debating whether to help their kids with a down payment. Do you pull your kids up financially and take a chunk out of your nest egg, or do you let them keep riding in hopes that they find their groove and smoothly land on their own? Below, we will walk through some, but certainly not all, of the considerations.
1. First-time homebuyers are priced out of the market.
When we moved in 2020, the market was much less competitive than it is today, but we kept getting outbid. I finally asked our Realtor, Maria, how this was possible. We had strong offers and what I thought was a strong enough balance sheet to back it up. She quickly responded that we were really competing against the parents of the other Millennials bidding on the properties. The market is sort of an anomaly, but here, they were making cash offers.
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According to Redfin, the median home price in Washington, D.C., in June 2024 (the latest data available) was $706,050. Assuming conventional financing and a 20% downpayment, that’s about $141,000 just for the down payment. Add at least $20,000 for closing costs, the move, furniture and other miscellaneous expenses, and they need to come up with $163,000. So, if they’re lucky enough to make $100,000 and disciplined enough to save 15% of their salary for a down payment, then they will be able to move out in just over 10 years.
Whether it makes sense to buy a home in this market as a Millennial or Gen Zer is another question to be addressed in a future article. But if homeownership is a goal, I would argue, behind education, that this is one of the biggest financial legs-up parents can give their kids.
2. You need to make sure you can afford it.
Just as the flight attendant tells parents of young children to put their own mask on first, you need to make sure that you will still have enough oxygen (money) if you give that $163,000 to your kid (multiplied by however many kids you have).
Any decent financial planning software should allow you to enter a goal of a “gift” and see the dollar impact this decision will have now and in the future. The mechanics, once again, will be the topic of a future column. If you want to double-check your numbers, you can use a free version of our planning software.
3. Money causes fights.
I’m sure you noticed that I acknowledged multiple kids above. Money has a funny way of pulling apart families, especially when things are not equitable. Now, imagine a scenario where you have two kids. Your daughter coasted through school with most of her education funded through scholarships. Your son grinded all the way through law school but now has student loans that make the saving component of a down payment too difficult. You decide to help him out. Your daughter has no loans and has already bought her own home. She didn’t need the assist but is aware that you helped her brother. You probably see how this may cause friction.
Nothing will ever be totally equitable, but I believe that things like this should be openly discussed. If it is too much to give all your kids the gift, the estate plan can be adjusted to make things even after your passing.
4. Is it a rope or quicksand?
This is a question I have asked many clients who are considering sizable gifts. A financial windfall can be a rope for some kids to get out of a hole. For others, the same gift will further sink them into a hole of bad financial decisions. You know your kids better than anyone and can probably guess the outcome.
The good thing about a gift like a down payment is that it is a one-time thing that comes with a forced savings mechanism in the form of future mortgage payments. If you’re considering helping your kids with a down payment, make sure you or your adviser has calculated whether they will be able to afford the future payments. A good rule of thumb is that you want to keep your housing costs below 30% of your gross income. So, if you’re making $100,000 per year, that would be no more than $30,000 per year in principal, interest, taxes and insurance.
My daughter fell on her way down that hill. It wasn’t bad. She got up. She has fallen many times since and has become a better, more fearless rider because of it. This is the path I prefer to take for now, given the circumstances. But if she’d broken her arm, as my older one has, I would probably be singing a different tune.
Related Content
- Buying a Home? You Need a Six-Figure Income and a Big Down Payment
- Three Ways to Give to Your Kids Tax-Free While You’re Still Alive
- Four Ways to Give Money Tax-Free to Your Kids When You Die
- To Protect Your Kids, Consider These Estate Planning Steps
- Your Home Would Be a Terrible Inheritance for Your Kids
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