Helping a loved one buy a home

Morgan Stanley Wealth Management

06/13/24

Summary: Record-high prices, rising mortgage rates and high inflation are all obstacles for potential new homeowners. Learn how you can help a loved one break into a tough market.

Two women holding up a house key.

Potential first-time home buyers are facing different challenges than the generation before them, fueled by higher interest rates and rapidly increasing home prices.1.2

Over the last few years, mortgage interest rates have risen sharply. The average 30-year fixed mortgage rate fell as low as 2.65% in early 2021, but by October 2023 it had risen to a 20-year high of nearly 7.80% as the Federal Reserve hiked its benchmark interest rate to combat soaring inflation.1

And it’s not just higher mortgage rates that homebuyers are facing. U.S. home prices are up about 45% since early March 2020.2 Many would-be buyers, are priced out of the housing market, including Millennials who are in their prime years for purchasing a home.

Fortunately, family can play a key role in helping to put a loved one’s dream of homeownership back within reach. In fact, financial assistance is becoming somewhat common for younger buyers. A 2023 National Association of Realtors report showed 22% of younger Millennials used a gift or a loan from a loved one to purchase their home.3

There are several ways to help with a home purchase. You may be most familiar with co-signing on the loan and gifting or lending the down payment. But you may have additional options including the following:

Help secure a more competitive interest rate

Some lenders offer special loan terms, including lower interest rates or reduced loan fees, based on the assets you already have with them. Referred to as Relationship-Based Pricing, these benefits may also extend to a loved one and in some cases, they may not need to have an account at the same financial institution.

Provide down payment funds by borrowing against your portfolio

You may want to consider a securities-based loan. This approach allows you to borrow against the value of eligible securities in your portfolio and establish a line of credit that you can use to help with a down payment, renovations, furnishings and more. It may be especially helpful in a competitive real estate market, where the ability to make a cash offer or provide a larger down payment can help your loved ones stand out from other buyers.

Another potential benefit is that by borrowing against the value of eligible securities, you can keep your investments intact and potentially defer some of the tax implications associated with selling assets.

Pledge assets as collateral for the mortgage

In lieu of securing cash for a down payment, some lenders may allow you to pledge eligible securities in your portfolio as a form of collateral for a mortgage. This approach can help reduce or eliminate the need for a traditional cash down payment and potentially reduce the interest rate of the mortgage.  

Whether it’s to help fund a down payment or make a cash offer, borrowing against eligible securities or using them as collateral may be mutually beneficial for you and the family member buying a home.

A potential win-win?

Whether it’s to help fund a down payment or make a cash offer, borrowing against eligible securities or using them as collateral may be mutually beneficial for you and the family member buying a home.

 

It’s important to note that borrowing against securities may not be appropriate for everyone. As with other loan types, there are risks. A sharp drop in equity prices could trigger a maintenance call. This means that the borrower may need to provide more capital immediately or sell the investments securing the loan, and the lender may sell securities at its own discretion.

As you consider your next steps, a Financial Advisor can help you navigate the right strategy for you and your loved ones.

1Source: https://fred.stlouisfed.org/series/MORTGAGE30US

2Source: https://finance-commerce.com/2024/02/home-prices-jumped-by-most-in-almost-a-year-in-november/

3National Association of Realtors, The 2023 Home Buyers and Sellers Generational Trends Report. https://www.nar.realtor/sites/default/files/documents/2023-home-buyers-and-sellers-generational-trends-report-03-28-2023.pdf

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