This faith and finance podcast is underwritten in part by Movement Mortgage.
Movement provides residential home loans in all 50 states. Founded in 2008, amidst one of the biggest financial meltdowns in American history, Movement set forth on a mission to create a movement of change in their industry, in corporate cultures, and in communities. So that a portion of their profit creates a long term positive impact in communities, both close to home and around the globe through the Movement Foundation and Movement Schools. It all comes back to their mission to love and value people.
Learn more at movement.com slash faith. home values and interest rates remain high. And that's leading some parents to consider becoming a bank for their kids.
Hi, I'm Rob West. On paper, it makes sense. If you have the resources to give your adult child a loan to buy a house, it seems like a great idea. But is it?
Are there pitfalls? We'll explore that idea today. And then take your calls at 800-525-7000.
That's 800-525-7000. This is faith and finance, biblical wisdom for your financial decisions. Of course, there are two reasons a parent might want to lend money to a child to buy a house. The first, obviously, is to reduce the amount of interest the child must pay. The parent might be able to make the loan at a below market rate. Second, the child may not qualify for a loan from a mortgage lender, he or she might have an unfavorable debt to income ratio, meaning too much of their gross monthly income is going to pay the debt they already have. Or they simply might not have enough credit history or a high enough credit score. This is where some parents may decide to help by becoming their kids mortgage lender.
It's natural to want to help family members, and God's Word tells us we should. 1 Timothy 5-8 reads, It's important for adult children to achieve financial independence. You want to make sure you're not encouraging them to remain dependent.
A financial gift or even a loan could possibly do that. Lending can also lead to additional problems. What if they don't pay it back? What if you need the money you loaned, but now you can't get it back because the kids can't or won't make their payments? How will that affect the relationship?
Badly, no doubt. That's why it's often better to simply make the money a gift rather than a loan. That way you're not expecting it to be paid back and there's no risk to the relationship. Of course, most parents aren't in a position to buy their kids a house. There's another potential downside to lending kids mortgage money, whether you're charging them interest or not.
It's the opportunity cost. How much more could that money earn over time if it were put into a properly diversified portfolio? Probably a lot more than the interest you'd be willing to charge your kids. And that could mean the interest you charge them, if any, will be below the current market rate. That means the difference between what you're charging and the market rate will be considered a gift by the IRS. If that amount exceeds $18,000 a year, you'll have to file IRS gift form 709 with your tax return, but it won't result in more tax.
The amount will just count against your lifetime gift tax exclusion of $13.61 million. And finally, there's one more downside to lending to kids for a home purchase. Since it's a private loan, their payments won't be reported to the credit bureaus and won't do anything to lengthen their credit history or increase their credit score. That means if they have to borrow for anything else, such as a car purchase, they'll end up with a higher interest rate or not qualify at all. But if they're saving thousands and thousands in mortgage interest, that trade off is probably worth it. Now, after all this, you probably think we're dead set against loaning money to kids for a home purchase.
That's not the case. We just want you to have the facts and be prepared for whatever might happen as a result. So let's say you decide to make the loan.
Now what? Is it with a handshake or verbal agreement like, Mom and Dad, you buy us a house and we'll pay you X number of dollars a month? No, you need to make this official and legal. For one thing, the IRS requires it, so you may want to have an attorney draw up a legally binding contract, just like a commercial lender would have to do. That contract will specify the amount of money borrowed, the interest rate to be charged, the term of the loan, and what the monthly payment will be. Also, what penalty will result from late payments of a specified time, usually 30 days. Now that's important, but the agreement will also specify that the home is collateral for the loan and that you, the lender, have the legal right to foreclose on the property if the borrower fails to make the payments.
To sum up, personal loans to family members can be extremely beneficial, especially to young folks, but they're not without certain risks, and it's important to understand those before going in. All right, we'll take your calls next. 800-525-7000.
Stick around. Absolutely free. We know you've learned to be suspicious of those words, but really, you can get biblical financial wisdom delivered to your inbox each week, absolutely free. Articles, videos, podcasts, and special offers on biblical resources. Nearly 60,000 people receive our free weekly wisdom email, and you can too. Create your free Faith Buy account by going to faithbuy.com and click sign up to begin receiving weekly wisdom in your inbox.
Welcome back to Faith and Finance. I'm Rob West. We've got some lines open. If you have a question today, we'd love to hear from you.
800-525-7000 is the number to call. Let's go to Lowell, Indiana. Hi, Ann. Go right ahead. Hi. I thank you for taking my call. The Bible says to ask for wise counsel, so I'm calling to ask for wise counsel.
I have two questions. My husband and I were older. I'm 63.
My husband's almost 80. We had a rental property before, and we sold that, but we would be interested in buying another one. It's a distressed property, and we want to know, because of what's going on in the world, the craziness, we just want to know, is that a wise decision for us to be buying property?
Yeah. I mean, it certainly could be. I like the idea of having diversified asset classes, meaning you might have a retirement account in stocks and bonds, and you can diversify away from that by having a piece of real estate. It can be a great income producer. We have a shortage of homes in this country, so I don't think we're in any kind of bubble situation where we could see a precipitous decline in real estate.
There are no systemic problems like we had in 2008, even though we do have our own challenges, namely the national debt and high inflation and a few other things. But being able to offset the effects of inflation, which reduces your purchasing power on your dollars, I like your wealth, what God has entrusted to you in appreciating assets like stocks, bonds, and real estate. I think when we get to this season of life, in your mid-60s and with your husband in his 80s, I think we always have to think about what type of investments should we have, should we be in active or passive investments, as real estate is certainly an active investment, because unless you hire a property management company which is going to eat into your returns, you've got to have the ability to keep up the property and make repairs and keep it in good working order and market it and deal with some of the things that come with being a landlord, which you all are very familiar with having done this in the past, versus more passive investments where you don't have to do anything and hopefully just over time they're growing and maybe throwing off some income. So given all of that, tell me your readiness in this season of life to take on another rental property.
My husband needs to go in for surgery, but he should recover from that quickly. I think we're ready. We've seen the property, it doesn't seem to us, because we're not able to check everything, not everything is on, but it seems like it's in good condition that we might put $25,000 in it to bring it up to where it needs to be. Yeah, and talk to me about the purchase price and what you have set aside that you would use for this purchase. Well, they're asking for $125,000, it's an auction. Okay.
And they said to have an additional 10%, so that would be the price. Okay. So not more than $150,000. I see. As far as the money, we do have the cash, it's in CDs, but we would have to break them, but it's minimal as far as the charges or penalties.
Yeah, very good. So what do you have in CDs total today? Well, we have close to $700,000. Okay, $700,000. And do you have other investments outside of the CDs? No, that's all we have. Okay, all right.
Yeah, very good. And so would you be looking to buy this with cash or would you take on a mortgage? No, just the cash.
Okay, very good. Yeah, I like this a lot because you'd be talking about putting maybe up to $150,000 of the $500,000 in. You know, I think the key here is you need to make sure that you understand what you're buying. So in some cases with an auction, you're not even able to view the inside of the home. Obviously, you could have fierce competition, you want to make sure that you've got a clear title on it, and that you understand the full extent of what you're going to need to put into it to get it ready to take on renters and have the ability and desire to do that. So are you going to get the ability to get a contractor in there to assess it before you make the purchase? No, my husband and I are both... We've had a lot of rental...
I have had a lot of rental properties and my husband is like a carpenter all of his life. We did have an opportunity to look at the property inside, but as I said, nothing was turned on. Yeah, got it. And we weren't able to go in the... You know, it's a crawl space, so things like that. But we did walk into the house and it looks fine.
Okay, yeah. Well, I think, I mean, obviously, just understand what you're getting, that you're not going to have it professionally inspected, which could lead to some surprises. You guys have been down this road before, and then I think the other piece of this is just evaluating the market that is in the surrounding area and kind of what demand is there for rent and what are the rental rates going for for an equivalent property and just making sure you could cash flow it the way you want. The good news is you've got the rest of this money in the CDs that if you needed to put a little bit more in, you could. And even though you're getting some nice rates on these CDs, that's not going to be around forever. So I kind of like the idea that if you're not interested in going into the stock and bond market, that you'd start to redirect some of this into real estate, which has the ability to appreciate more than, let's say, the CD rates you're probably going to be facing three years down the road. So I think this is a good plan, especially since you don't have to have any debt service.
You're not going to have a mortgage, so you don't have to worry about these high mortgage interest rates right now. So I think for all of those reasons, Anne, you guys have the experience. You know what you're getting into.
Your husband is handy. You've done this before. I like this approach, and I don't think there's anything that, despite the unrest in the world, that would cause me to want you guys to hold off on this. Okay, very good. I had another question if you have time. Real quick, yeah. Okay. Well, I just wanted to know, we sold the property a couple of years ago, and we had to pay capital gains. And I'm questioning it because I heard another caller call you.
Anyway, I'll be quick. Is that across the board that you have to pay capital gains? Yeah, what year was it that you sold it? Two years ago. It was 21.
Okay, yeah. And you had held it for more than a year? It was a rental property. We held it more than a year, yes.
Okay. So in 21, it would have been, if you had your adjusted gross income, if you were married filing jointly above $80,800 for the year, then your capital gain rate, long-term capital gain rate, would have been 15%. Under that $80,800 adjusted gross income, married filing jointly, it would have been at zero. Oh, okay. But that's including the sale of the property, right? No, no. Just your adjusted gross income, not the gain itself. Oh, okay.
So it would be zero then. So I can go to my tax man and have him look at that? Yeah, I would have him check it out. There may be another factor here I'm not considering in your situation, but if your income for that year was under $80,000 and you were married filing jointly, it'd be worth him at least looking at just to see, did we in fact owe the capital gains? And if you didn't, you could file an amended return. So I'd get with your CPA. Thanks for your call, Ann. Well, we need to take a break. This is Faith in Finance.
We'll be back after this. Do you feel like your hands are tied with debt preventing you from serving God? If you have credit card debt, Christian Credit Counselors can help. Through our debt management program, we can get you out of credit card debt about 80% faster while honoring your debt in full. For more information on how Christian Credit Counselors can help, visit ChristianCreditCounselors.org. That's ChristianCreditCounselors.org or call 800-557-1985. 800-557-1985. Welcome back to Faith in Finance. I'm Rob West.
This is the program where the 2,300 verses on money and possessions found in God's word intersect with today's financial decisions and choices. The number to get in on the conversation, 800-525-7000. That's 800-525-7000. Let's head to Canton, Ohio. Hi, Mike.
Go ahead, sir. How are you doing? Great.
Thanks. So here's my situation. I've never been good with money my whole life. I've had decent jobs and just have been going through it just just frivolously. And a couple years ago, God touched my life and started to work with me with money. And since then, I've actually I'm 65 years old now and I've actually started to save money. And two years ago, I started to tithe listening to the principles that you've been preaching and others in my life from a religious standpoint. And God has worked on my life to say that everything that I have really belongs to him. And, you know, what I give is what he puts on my heart to give. And I tithe as a discipline. And I've actually been actually turned my life around.
My question to you is this. I don't know what else I can do. I I make eighty thousand a year. My job. I've been able to in the last couple of years to get about eighty thousand put in my 401k. My company matches five percent of it.
And I put my max in for the last couple of years and it's grown a little bit. I have probably about fifteen thousand dollars worth of credit card debt, about fifteen thousand dollars worth of loan debt. I rent right now, so I don't have a mortgage.
I rent and I have about five thousand dollars in savings. And I was wondering if you could give me some advice as to what I can do over the next, you know, two, three years. I think as long as the Lord continues to bless my health, I have the type of job that I work out of my home.
And it's more of a consulting type job. So I'm able to to continue to make the money I made. And I'm on pace right now that if I work for the next couple of years, you know, Social Security be around.
It's telling me that I should have about forty two hundred dollars a month in Social Security. OK. Yeah, Mike. Well, I appreciate that background. And first of all, let me just affirm this idea that, you know, the most important decision you've made is to surrender your life to Jesus and really to pursue him and recognize that he is our abundance. First and foremost, he's not the access to our abundance. He is our abundance. And when we see him as our ultimate treasure and then realize our role then is faithfulness, faithfulness to opportunity, which is as a steward of God's word and our relationships and our time and the calling and the skills that he's given to us.
And yes, the financial resources. And so we immerse ourselves in God's word to try to, you know, conform our minds to the image of Christ and really pursue righteousness. And we get involved in a church family. And, you know, those are the things that I hear you describing. And obviously that transforms our lives.
And I love the fact that you've even had a tangible demonstration of that through the act of giving, which is really should be an act of worship and something that we should do. And it has a way of loosening the grip of money over our lives. So I think the key for you right now is really to stay on this track, to continue to work as long as you can. Let that Social Security build up to age 70.
It'll grow 8 percent a year. That'll maximize that check. And let's focus on getting you out of debt right now. I want to do two things.
I want you to connect with our friends at christiancreditcounselors.org to get the interest rates down. And I want to connect you with a coach. So stay on the line.
Let's go to Indianapolis. Hi, Sean. Go right ahead. Hi, Rob. Thanks for taking my call.
A question is, is it a good choice to reduce my 401k contribution down to just what my company matches and take that added income to pay off a car debt? Yeah. It's a good question. Yeah.
I mean, you don't want to give up the match. That's free money. You know, what are you putting in percentage wise now and what would you be putting in percentage wise if you reduced, you know, your contribution? So currently I'm putting in 16 percent and I would take it down to 5 percent, which is what the company matches. OK, so you're getting 21 percent now between your portion and the match or is it 16 all in? Correct.
No, 21 total. OK. Yeah. So you'd have 10 percent going in. And what would that do in terms of your payoff? How quickly would you be able to pay it off if you did that?
We should approximately be able to pay this vehicle off within two years. Yeah. OK. And what is your age?
52. OK. Yeah. I mean, I like that. I mean, if you want to prioritize being debt free, I expect this is at a higher interest rate. I mean, you know, you've got to factor in the opportunity cost, which is just, you know, the more you put in, you know, the more you have that compounded growth, not just for the next two years, but for the next 20 or 30 years or more. If the Lord tarries and you're in good health, I mean, you need this money to last to your 90s or beyond.
And so what is the potential value of that? You know, that extra 10 percent, let's say 11 percent that you would have put in over 24 months compounded for the next 30 years. It's going to be a lot more than the interest you pay. So I guess that would be the only consideration is, you know, apart from you just having a conviction to be debt free as soon as possible. And then I'd say go for it.
If you're really just looking for the math. Yes, you'd pay off the debt. But in terms of the compounded effect of that money growing on a tax deferred basis, you know, for the next 30 years. And I'm obviously going well beyond your retirement date because you need this money to last for decades, potentially in retirement.
You know, that's where I think you continuing to contribute at the level you are and just paying the car off a little slower out of current cash flow probably would come out better on paper just because of the effect of compounding. Does that make sense? Yeah, that does. I didn't think of it that way.
Yeah. So I think that's the only consideration. But again, if you guys are like, listen, we thought about it, maybe we've prayed about it and we just feel like we should be out of debt as quickly as we can.
Well, then go for it. And then 24 months from now, you bump that back up to 21 percent. The other option is you split the difference. Maybe you don't go all the way down to five. Maybe you go to 10, which allows you to put in 15 percent instead of paying it off in two years or paying it off in three.
But I think you do have to look at the impact of that compounding on that money that you haven't put in over the next two years, you know, into the future before you fully appreciate the impact financially of that decision. Thanks for your calls, John. God bless you, my friend.
And that's going to do it for us today. And as we wrap up, let me just say thanks for being with us today. Thank you for your calls.
Thank you for listening. And thanks for being a faithful supporter of this ministry. You know, beyond the broadcast, we have an entire team of contributors and coaches working each day to develop tools and content to help you become a better biblical money manager.
And none of that work would be possible without your financial support. We offer a lot of it for free, and that's only because of the generous gifts from listeners like you. If you like today's program, why not share it with a friend? And while you're at it, share the Faithfi app with them as well. Help us get the word out. Thanks for listening and sharing, and I hope you'll come back and join us again next time for another edition of Faith and Finance. Faith and Finance is provided by Faithfi and listeners like you.
