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Real Estate Matters: Parent seeks loan to help pay for daughter’s home renovation

Ilyce Glink and Samuel J. Tamkin, Tribune Content Agency on

Q: I read your articles regularly. I would love your opinion on options for financing an addition on my daughter’s house.

Once her renovation is done, we will live with her. We currently own our own home and have no mortgage. We hold title to the house in our living trust. All of our money is tied up in our IRAs, and we have little in savings. I withdraw monthly from the IRA to supplement our Social Security payments for day-to-day living expenses.

Withdrawing approximately $300,000 from my IRA to help her pay for the addition would cause us to owe a huge tax bill. My house would probably sell for around $650,000, but my daughter and her family are living with us until their house is done.

My plan is to get a mortgage on our current home to help them pay for the addition and pay the loan off when I sell our house. I estimate it will take a year to complete their addition before we can all move into the home.

Do you have any recommendations on which type of loan to pursue? Can my daughter take out a second mortgage to assist her with financing the home? In any case, I would pay off the loan or mortgage when I sell my house.

A: Here’s the good news: You’ve got a number of options to move forward.

 

That said, we’re glad you’ve eliminated the first: withdrawing funds from your IRA. As you correctly note, withdrawing that much money from a tax-deferred account would likely trigger a big tax bill. You’d have to pay income tax on those funds. And $300,000 is a large enough amount that it would probably push you into a higher tax bracket. Also, you didn’t mention your age, but if you are under 59 1/2, you might owe penalties on top of the taxes.

There are other ways to finance this renovation.

First, as long as your home is not currently listed for sale, you can do a cash-out refinance of your property. Lenders should allow you to borrow up to 70% or even 80% of the value of your home today. If your home is worth $650,000, 70% of that would allow you to net $455,000 in cash.

Interest rates are a lot higher today than they were a year ago, so this move will cost you. As we write this, you’d pay around 5% for a $455,000 30-year fixed rate refinance mortgage. You could expect to pay 1.5% in upfront fees, and the monthly payment would be around $2,400. These numbers assume that your credit scores are at least 740. Note that some lenders will require you to have a 760 credit score, or higher, to access their best programs.

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