Home Equity Question

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winski58
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Home Equity Question

Post by winski58 » Fri Jul 31, 2020 6:30 am

Considering a Home Equity Loan to fund a home improvement for my daughter. She and her husband both have high incomes but very little equity in their home. They would pay for all closing costs and make monthly payments (via monthly transfers to my account) and pay back the loan in 12 months. Are there and tax implications or words of caution related to this?

GmanJeff
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Re: Home Equity Question

Post by GmanJeff » Fri Jul 31, 2020 6:52 am

Why wouldn't they handle such a matter themselves, given they have "high incomes"?

Alternatives to consider which pose no financial or relationship risk to you:

1. They save for 12 months and thereafter pay for the home improvement themselves without involving you.
2. They obtain their own loan from a commercial lender, using their own credit, without involving you.

bob60014
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Re: Home Equity Question

Post by bob60014 » Fri Jul 31, 2020 7:51 am

First question, are the home improvements necessary or just nice to have?

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lthenderson
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Re: Home Equity Question

Post by lthenderson » Fri Jul 31, 2020 8:26 am

Since most home improvement projects don't require all the money up front, I would consider cash financing the first payment to get the project started and then let the daughter make subsequent payments as required and pay me back the down payment a year later when everything is done.

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JoeRetire
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Re: Home Equity Question

Post by JoeRetire » Fri Jul 31, 2020 11:59 am

GmanJeff wrote:
Fri Jul 31, 2020 6:52 am
Why wouldn't they handle such a matter themselves, given they have "high incomes"?
Good point!
1. They save for 12 months and thereafter pay for the home improvement themselves without involving you.
Bingo! Seems like the obvious solution to me.

Loans to high-income daughters and sons in law are a bad idea, IMHO.

Now, knowing that most folks who ask questions here don't really want "don't do that" advice, you really need to talk with your tax accountant to structure the loan properly. The IRS frowns when friends and family loans are given without close to market rate interest being charged. Avoid problems by paying for professional advice first. Your tax professional will also help you draft a loan agreement with your daughter/son-in-law that will spell out the proper terms.
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Nate79
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Re: Home Equity Question

Post by Nate79 » Fri Jul 31, 2020 4:58 pm

My guess they have high income but are broke like most people in this country.

No, they should save up cash and do the home improvement with no consumer debt.

mkc
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Re: Home Equity Question

Post by mkc » Fri Jul 31, 2020 8:40 pm

If they have very little equity in the home, how would this be a home equity loan? Home equity loans are based on having equity in the home already, and using that to borrow against for improvements.

You aren't considering a HELOC on your own home to finance their remodel, are you?

If they are high-income individuals, they should be able to budget for their own remodeling project.

surfstar
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Re: Home Equity Question

Post by surfstar » Fri Jul 31, 2020 8:43 pm

Patience is a virtue.
Delayed gratification is rare today.

I think they'll figure it out on their own and everyone will be better off.

Silverado
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Re: Home Equity Question

Post by Silverado » Fri Jul 31, 2020 8:55 pm

mkc wrote:
Fri Jul 31, 2020 8:40 pm

You aren't considering a HELOC on your own home to finance their remodel, are you?
That’s how I read it. Bad idea, for all the reasons mentioned and a couple that have not.

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jabberwockOG
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Re: Home Equity Question

Post by jabberwockOG » Fri Jul 31, 2020 10:59 pm

Words of caution? Yes - run in the other direction : )

You are asking if it's a good idea to pledge your home to finance a loan for a family member that supposedly has "high incomes" but no equity and I assume no savings? It is a very bad idea. Folks with high incomes can get their own loan assuming they don't have bad credit issues. And if they do have credit issues the very last thing they need is another loan to pay (on a loan that puts your home and finances at risk because you are 100% responsible if they can't pay). Don't do it. The young couple need to learn about the concept of deferred gratification, and saving up for things they want, and slowly and patiently building equity before spending more money to remodel.

drk
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Re: Home Equity Question

Post by drk » Fri Jul 31, 2020 11:07 pm

They should be able to get a personal line of credit even if they don't have home equity to borrow against.

momvesting
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Re: Home Equity Question

Post by momvesting » Sat Aug 01, 2020 12:24 am

If they are capable of paying it off in 12 months, would a 0% credit card be a better fit than paying interest plus closing costs? That way they could do it on their own as well.

wilked
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Re: Home Equity Question

Post by wilked » Sat Aug 01, 2020 6:42 am

The best lesson you can give is to empower them to not rely on others for financial help. I am also going to guess they do not have an emergency fund of any significance, and in an emergency would turn to you for help.

Teach them the power of savings and long term planning. Offer to help paint, or help them diy some smaller upgrades in the meantime.

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JoeRetire
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Re: Home Equity Question

Post by JoeRetire » Sat Aug 01, 2020 6:51 am

Nate79 wrote:
Fri Jul 31, 2020 4:58 pm
My guess they have high income but are broke like most people in this country.
Most people in this country are not broke.
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pharmermummles
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Re: Home Equity Question

Post by pharmermummles » Sat Aug 01, 2020 6:55 am

I'll break with the consensus here. It is all very personal and depends on your relationship with them and how responsible they are. I benefited from an $8000 loan from my father to help buy a house when I had just got out of college and had high income but very little actual cash. My dad wasn't worried because he knew there was zero possibility of me not repaying that loan, even if I lost my job and had to work minimum wage and eat Ramen. I have other siblings he probably wouldn't have done the same for :twisted: . In the meantime, it allowed my wife and I to buy a house which would otherwise have been impossible (after signing a form saying that it was technically a gift that we decided to gift back later to appease the underwriters :D ).

So this isn't necessarily advice to go ahead with it. There is nothing at all wrong with the advice you have received. It is in general good advice to avoid this stuff like the plague. But if you are certain you raised your daughter right, you could be saving them a bit of interest. Just understand it is a risk should something happen to their income and be financially capable of making the loan payments yourself if disaster should strike.

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jabberwockOG
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Re: Home Equity Question

Post by jabberwockOG » Sat Aug 01, 2020 7:08 am

pharmermummles wrote:
Sat Aug 01, 2020 6:55 am
I'll break with the consensus here. It is all very personal and depends on your relationship with them and how responsible they are. I benefited from an $8000 loan from my father to help buy a house when I had just got out of college and had high income but very little actual cash. My dad wasn't worried because he knew there was zero possibility of me not repaying that loan, even if I lost my job and had to work minimum wage and eat Ramen. I have other siblings he probably wouldn't have done the same for :twisted: . In the meantime, it allowed my wife and I to buy a house which would otherwise have been impossible (after signing a form saying that it was technically a gift that we decided to gift back later to appease the underwriters :D ).

So this isn't necessarily advice to go ahead with it. There is nothing at all wrong with the advice you have received. It is in general good advice to avoid this stuff like the plague. But if you are certain you raised your daughter right, you could be saving them a bit of interest. Just understand it is a risk should something happen to their income and be financially capable of making the loan payments yourself if disaster should strike.
I agree that if the OP is well off and has the assets, they can just give the money as a one time gift instead of putting up their home as collateral. But signing up for formal loans on the behalf of family members, or even worse "friends" is a bad idea.

pharmermummles
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Re: Home Equity Question

Post by pharmermummles » Sat Aug 01, 2020 7:12 am

jabberwockOG wrote:
Sat Aug 01, 2020 7:08 am
pharmermummles wrote:
Sat Aug 01, 2020 6:55 am
I'll break with the consensus here. It is all very personal and depends on your relationship with them and how responsible they are. I benefited from an $8000 loan from my father to help buy a house when I had just got out of college and had high income but very little actual cash. My dad wasn't worried because he knew there was zero possibility of me not repaying that loan, even if I lost my job and had to work minimum wage and eat Ramen. I have other siblings he probably wouldn't have done the same for :twisted: . In the meantime, it allowed my wife and I to buy a house which would otherwise have been impossible (after signing a form saying that it was technically a gift that we decided to gift back later to appease the underwriters :D ).

So this isn't necessarily advice to go ahead with it. There is nothing at all wrong with the advice you have received. It is in general good advice to avoid this stuff like the plague. But if you are certain you raised your daughter right, you could be saving them a bit of interest. Just understand it is a risk should something happen to their income and be financially capable of making the loan payments yourself if disaster should strike.
I agree that if the OP is well off and has the assets, they can just give the money as a one time gift instead of putting up their home as collateral. But signing up for formal loans on the behalf of family members, or even worse "friends" is a bad idea.
I suppose that's right. Fronting someone the money if it's sitting in your account is one thing. My dad didn't have to take out a loan to do what he did for me.

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Nate79
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Re: Home Equity Question

Post by Nate79 » Sat Aug 01, 2020 9:21 am

JoeRetire wrote:
Sat Aug 01, 2020 6:51 am
Nate79 wrote:
Fri Jul 31, 2020 4:58 pm
My guess they have high income but are broke like most people in this country.
Most people in this country are not broke.
I disagree. The average person has about $40k in debt excluding mortgage and cant scrape together $600 to pay for an emergency. Living above their means, in debt (consumer, student loans, etc), with no real emergency fund = broke.

OhBoyUhoh
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Re: Home Equity Question

Post by OhBoyUhoh » Sat Aug 01, 2020 9:44 am

Average person has 40k in debt? Seems high, got any sources to support this claim?

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Nate79
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Re: Home Equity Question

Post by Nate79 » Sat Aug 01, 2020 10:17 am

OhBoyUhoh wrote:
Sat Aug 01, 2020 9:44 am
Average person has 40k in debt? Seems high, got any sources to support this claim?
This has been reported many times in the news but here seems to be the link to the actual study:
https://news.northwesternmutual.com/pla ... gress-2018

https://www.cnbc.com/2018/08/20/how-muc ... y-age.html

Don't know why it should be surprising when you add up credit card, car debt, personal debt, and student loans.

megabad
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Re: Home Equity Question

Post by megabad » Sat Aug 01, 2020 10:22 am

momvesting wrote:
Sat Aug 01, 2020 12:24 am
If they are capable of paying it off in 12 months, would a 0% credit card be a better fit than paying interest plus closing costs? That way they could do it on their own as well.
+1 on this. Would be cheaper and cleaner for everyone. Can’t see a reason to not do this.

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JoeRetire
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Re: Home Equity Question

Post by JoeRetire » Sat Aug 01, 2020 5:54 pm

Nate79 wrote:
Sat Aug 01, 2020 10:17 am
OhBoyUhoh wrote:
Sat Aug 01, 2020 9:44 am
Average person has 40k in debt? Seems high, got any sources to support this claim?
This has been reported many times in the news but here seems to be the link to the actual study:
https://news.northwesternmutual.com/pla ... gress-2018

https://www.cnbc.com/2018/08/20/how-muc ... y-age.html

Don't know why it should be surprising when you add up credit card, car debt, personal debt, and student loans.
Can you point out the part that says more than 50% of people in the US are broke? I couldn't find it.
It's the end of the world as we know it. | It's the end of the world as we know it. | It's the end of the world as we know it. | And I feel fine.

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anon_investor
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Re: Home Equity Question

Post by anon_investor » Sat Aug 01, 2020 6:09 pm

Nate79 wrote:
Fri Jul 31, 2020 4:58 pm
My guess they have high income but are broke like most people in this country.

No, they should save up cash and do the home improvement with no consumer debt.
+1.

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Nate79
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Re: Home Equity Question

Post by Nate79 » Sat Aug 01, 2020 6:24 pm

JoeRetire wrote:
Sat Aug 01, 2020 5:54 pm
Nate79 wrote:
Sat Aug 01, 2020 10:17 am
OhBoyUhoh wrote:
Sat Aug 01, 2020 9:44 am
Average person has 40k in debt? Seems high, got any sources to support this claim?
This has been reported many times in the news but here seems to be the link to the actual study:
https://news.northwesternmutual.com/pla ... gress-2018

https://www.cnbc.com/2018/08/20/how-muc ... y-age.html

Don't know why it should be surprising when you add up credit card, car debt, personal debt, and student loans.
Can you point out the part that says more than 50% of people in the US are broke? I couldn't find it.
https://www.forbes.com/sites/maggiemcgr ... emergency/

>60% can't afford a $500-1000 emergency. And >60% dont even have $1000 in a checking or savings in total. 45% have zero savings.

https://www.statista.com/chart/20323/am ... k-savings/


Also about 40% of households have revolving credit card debt. 25% of Americans have student loans and 33% auto loans.

80% of workers live paycheck to paycheck:
https://www.cnbc.com/2019/01/09/shutdow ... check.html

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