For the more than 76 million individuals born in the United States between 1946 and 1964, planning ahead can become a much more challenging task as parents age and children enter college. Just as they are busy with careers and focused on providing for their own retirement needs, boomers are feeling an intergenerational tug on their purse strings as bills accumulate for health care and housing for their parents, as well as for their kids’ tuition. Additionally, with the sharp rise in home prices over the past five years, a growing number of adult children are turning to their parents for help with financing their first home.
With demands for cash coming from every direction, where can members of the sandwich generation turn for solutions? Fortunately for these boomers, several options for managing cash flow and boosting liquidity can be found no further than their front door. Finding the right mortgage and managing home equity wisely can add much needed flexibility for responding to shifting financial needs.
Attending to Two Generations
Raising kids and caring for parents simultaneously can be a time-consuming and costly endeavor. According to the American Association of Retired Persons (AARP), there are an estimated 44.4 million unpaid caregivers in the United States who care for another adult age 18 or older. Most of these caregivers are employed, and most have had to make adjustments to their work schedule to accommodate their personal responsibilities. Meanwhile, college costs continue to rise at about double the pace of overall inflation. The College Board reports that the average cost of one year at a four-year public university totaled $15,566 for the 2005-2006 school year; for private colleges and universities, that figure jumps to $31,916.
Ideally, savings and investments will cover the costs of college, and the assets of aging parents will offset the financial burdens of paying for their professional care and medical attention. But unfortunately, that is a best-case scenario, and even for affluent families life is seldom so simple.
Help From Home Equity
One of the first and easiest steps any homeowner can take to ensure that liquidity needs will not go unmet is to establish a home equity line of credit. A home equity line can allow you to tap into the equity in your home with the simplicity of writing a check to cover tuition, health care costs or other pressing expenses. Interest on home equity lines is generally tax-deductible, as opposed to the interest on credit card debt, auto loans or most other forms of personal credit.1
Even if it is just to bridge cash-flow gaps, establishing a home equity line of credit can be a useful tool. Because it generally is inexpensive to set up, it is best to establish one before you need it. However, you should always consider your ability to pay off a line of credit before you establish one.
If you are still carrying a mortgage on your home or an investment property, another solution for managing cash flow needs is to give yourself some latitude in your monthly mortgage payments. One way is to obtain a mortgage that only requires you to pay interest each month. There are interest-only mortgages available with rates that are fixed—a potentially attractive feature in today’s rising-rate environment. You can make fully amortizing payments including principal, or you can just pay interest, which provides you with some financial leeway when cash is tight.2
Depending on the health and other physical circumstances of a parent, it may be necessary to make some major changes to living arrangements. Elderly parents may need to move into an assisted living facility or a nursing home for access to around-the-clock care, or they may simply need occasional visits from a home health care provider. Some parents are even moving in with their adult children.
Assuming your parents have a home with substantial equity, there are a number of options to consider when faced with the need to make major expenditures for their long-term care. Although it may be a delicate issue, one option is to sell their home and either downsize to a home more appropriately sized for their needs or use the proceeds to pay for long-term care and/or residence in an assisted living or nursing care environment. Depending on the value of the home and the level of parental assets, there could be estate tax implications you will want to discuss with tax and financial professionals.
In the event you decide to have your parents live with you, you may want to build an addition on your home; or if you have a large piece of property, to build an additional house. Both of these objectives can be accomplished using your home equity as collateral for a construction loan that later converts into a fully amortizing loan.
Children may also turn to their parents for help in buying a home, especially in today’s real estate market. Some mortgage products allow for 100% financing and do not require mortgage insurance premiums.
Innovative mortgage products can help provide the flexibility necessary to meet the dual financial burdens of caring for children and parents at the same time. Building some flexibility into your budget can help you remain on course for attaining your long-term financial goals.
Larry Washington is chairman and CEO of Merrill Lynch Credit Corporation.
All residential mortgage programs are offered and funded by Merrill Lynch Credit Corporation (“MLCC”), 4802 Deer Lake Drive East, Jacksonville, FL 32246-6484; toll-free telephone: 800-854-7154. AZ License BK-10071; CA Real Estate Broker’s License 00831469 – CA Department of Real Estate (916) 227-0931; IL Residential Mortgage Licensee; MA Mortgage Lender License ML1436 & ML2078; Licensed by the New Hampshire Banking Department; Licensed by the NJ Department of Banking and Insurance; RI Licensed Lender. This is not an offer to enter into a rate lock-in agreement under Minnesota law. An offer may only be made in writing. MLCC is a primary and secondary mortgage lender.
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1 Merrill Lynch does not provide tax advice. Please consult your tax advisor regarding the deductibility of mortgage interest. Interest expense may not be deductible for all taxpayers.
2 After the interest-only payment period, monthly payments will increase because they will be based on a fully amortized repayment schedule of principal and interest.