Many Texas residents who are in or nearing retirement are probably considering estate planning, maybe even for the first time. As part of the estate planning process, they may be looking at investment decisions that maximize the amount of the estate without putting it at jeopardy. However, investments in financial assets that are traditionally viewed as safe also usually have a low return on investment.
A recent news report has highlighted one financial decision many parents are making that potentially offers a better return on investment. With so many unwilling to risk the stock market as of late and with the average return on a one-year certificate of deposit being only 0.4 percent, some parents are deciding to finance their adult child’s mortgage. Such a situation may offer a win-win as the parents get a return on investment they couldn’t otherwise and the child gets a mortgage at a lower rate than one offered by banks, without the red tape and attendant closing costs.
Although such parent-financed mortgages have always existed, their use has increased since banks tightened loan conditions following the housing crisis in 2008. Indeed, many in the housing market are unable to get a mortgage without having a nine-to-five job, even if they can make a 20 percent down payment. Likewise, having a full-time job may not be enough without the 20 percent down payment. This offers investment opportunities for parents who have grown children and may have a large financial portfolio.
Even parents of lesser means may consider financing the down payment for a child who is purchasing a home. By making these kinds of investments that potentially offer a better rate of return than other more traditional investments, parents may be able to maximize the size of the estate they leave behind.
Source: LoanSafe, “Some Home Buyers Bank on Their Parents,” Alex Ferreras, Oct. 8, 2011