Baby Boomer downsizing is emerging as a niche industry. The proven practicality, simplicity and feasibility of ditching the larger home for a smaller and more manageable residence is enticing more North Americans to take the plunge every day. What’s more, the Baby Boomer generation, which is the second-largest group of homebuyers (31%) behind Millennials (35%), is downsizing with more creativity and thoughtfulness than ever. As a result, more and more Baby Boomers are selling their residences to their children to enjoy the benefit of keeping the home in the family while simultaneously achieving their goal of downsizing. The following are different strategies available to those wishing to downsize by having their children take over their existing mortgage.
Sale and Leaseback
One of the most popular options available is a sale and leaseback, where the children purchase the home from their parents and the parents subsequently rent a portion of the home or the entire residence. This option allows the sellers immediate access to their home equity while the children benefit from tax deductions that result from owning a rental property.
Another sale and leaseback scenario would be where one or more of the children buy their parents’ home to occupy as their primary residence, while the parents downsize to an in-law suite within the home. If multigenerational living seems like an appealing idea, this may be the most feasible option.
For many homebuyers, the biggest challenge they face is coming up with enough money for a down payment. If a homeowner’s children wanted to purchase their home, the homeowners have the option to give their children a gift of equity, whereby the children would be able to purchase the home with very little money down or none at all. This scenario makes most sense if the parents sell the home without incurring any brokerage fees or closing costs, thereby utilizing the savings as an equity gift for the down payment. If both parties agree on a purchase price below market value, the difference could also be utilized as a gift from the parents to their children.
Another option the homeowner has is to transfer the property to the children via a refinance rather than a purchase and sale. In this case, the parents can add one or more of their children to the home title so the children can make mortgage payments. After a certain period of time (approximately one year), the mortgage can be refinanced solely in the children’s names, removing the parents from the title altogether. This process can be executed via a rate-and-term refinance. If the parents want to extract money, then the refinance will be a cash-out.
For many Baby Boomers, transferring a home to their children has many benefits. It allows them the potential opportunity to downsize, access home equity, create a multigenerational living environment and help their children become homeowners without breaking the bank. While there are many benefits associated with this type of property transfer, there may also be some disadvantages. The homeowners may be able to sell their home for a higher price if they choose to list it on the open market with a broker rather than transfer the property to a family member. Also, the home may be in need of some repairs depending on its age, which could potentially create some headaches for the children if they decide to take ownership. In any case, it would be wise to consult a financial planner, attorney and other associated experts before making a final decision.