Real Estate Matters: How to best help parents struggling with loan payments
Q: My parents owe about $500,000 on a mortgage and home equity loan for a property that’s worth around $900,000. They want to stay in the home, as they are elderly and don’t want to go through the process of moving. They are also, however, in default (COVID-19 protected for now) of their mortgage as they cannot afford the mortgage payments.
Can I somehow buy the property from them/the bank for $500,000 so they can stay in the property?
A: The short answer is likely yes, but there are a few other considerations to take into account, as well other options that could help save your parents’ home.
First, your parents have around $400,000 in equity in their home. If you were to buy the home for $500,000, that would give your parents enough money to repay their lender(s), but it would deprive your parents of the $400,000 equity, which it sounds like they desperately need.
We don’t know if you have that kind of cash laying around to pay off your parents’ loan(s), but if you do, you could become your parents’ lender instead.
Let’s say you use that money to pay off your parents’ lender and replace that loan with a loan from you to your parents. Your terms might be significantly less than the loan they currently have. While we don’t know if your parents inability to pay their lender is due to COVID-19 or other financial circumstances, if they do have the ability to pay a loan but their current loan payments are too high, you might give them better terms. For example, if their loan interest rate is 5%, you might offer them a rate that is half that amount. This lower amount could be the difference your parents need to make their payments.
On the other hand, if they simply can’t afford to make the loan payments, real estate taxes, insurance and other costs associated with homeownership, you might be right to step in and help them out. The question is, to what degree do you want or need to help them out? You can simply make the loan payments yourself and that would help them out greatly until their financial situation improves. Or, as you suggested, you could buy the home from them.
Now, if you decide to buy the home from them and it’s worth $900,000, you might want to structure the deal so that their loan gets paid off but they don’t lose the equity they have in the home when they sell it to you. For that $400,000 in equity, they may get the right to live in the home for their rest of their lives for free or some other arrangement that works for them and for you.
Don’t forget to think about other siblings and/or heirs who might be eyeing (or hoping for) an inheritance down the line. We suggest that you consult with an estate planner and attorney to see what structure would work best for all of you.
There are a bunch of ways you might be able to help them financially. But, you’ve got to sit down and talk with your parents about money — typically a fraught conversation for anyone, but especially when it’s the child broaching the subject with their parents.
Once you lay out some options with them at a high level, you can talk with an estate planner or real estate attorney to get into the details on how best to save their home while preserving the equity they desperately need. Take care to navigate the situation carefully so that the family ends up in better shape financially and emotionally, without any hard feelings.
(Ilyce Glink is the author of “100 Questions Every First-Time Home Buyer Should Ask” (4th Edition). She is also the CEO of Best Money Moves, an app that employers provide to employees to measure and dial down financial stress. Samuel J. Tamkin is a Chicago-based real estate attorney. Contact Ilyce and Sam through her website, ThinkGlink.com.)© 2020 ILYCE R. GLINK AND SAMUEL J. TAMKIN. DISTRIBUTED BY TRIBUNECONTENT AGENCY, LLC.