Pay Dirt is Slate’s money advice column. Have a question? Send it to Kristin and Ilyce here. (It’s anonymous!)
Dear Pay Dirt,
I’m lucky to come from a wealthy family, with grandparents and a father who were well-versed in their finances. They’ve passed, as has my dad (their son), and my mom is now the main communicator about family finances.
The problem is that she’s hopelessly ignorant about her finances. For about a decade after my dad died, she confidently told my siblings and me that she would help us significantly with down payments when we chose to buy homes—up to $50,000. My husband and I have saved up around $50,000 ourselves, and we were hoping that her support would help us get past 20 percent on a $400,000 property.
When my husband and I became serious about buying a house and started asking questions last year, she told us that the money was all tied up in a bypass trust and she couldn’t help us as she’d promised. Then, she said the trust could buy the house outright and we could make payments to the trust instead of having a mortgage, which seemed great to us because the interest would be going back to a family asset, instead of a bank. But now, we’ve been told that’s financially irresponsible and the best thing is to take a loan from the trust to increase our down payment—but then we’d be paying TWO loans, one to a bank at the current interest rate (yikes) and one to the trust at the family interest rate (around 4.5 percent right now).
Is it worth it to put more money down and be paying off two loans at once? Or is the 20 percent rule outdated and $50,000 is enough to avoid mortgage insurance? The trust will eventually benefit me and my sibling, but only after my mom dies. She’s 63 and in great health, so we might be in our 60s ourselves before we can access that money.
—Almost a Trust Fund Baby
Dear Almost a Trust Fund Baby,
Let’s start with some mortgage basics: If you don’t put down at least 20 percent for a down payment, you will pay private mortgage insurance (PMI). PMI is expensive, but it allows you to purchase a home with as little as 3 percent down. And, it’s charged on a sliding scale, so you’ll pay a higher amount of PMI the less cash you put down on the property. The fact that you can buy a home with less than 20 percent down might very well be worth it, even if your loan comes with a higher interest rate and more in mortgage points and fees upfront.
I’m wondering about your status with the trust. Are you a beneficiary of the trust and your mother is the trustee? Is she the primary beneficiary and you’re a successor beneficiary? These details are important. If she is the trustee, she might well be able to prevent you from accessing those funds. If she is the beneficiary and the trustee, she will have the final say.
The fact is, you have already saved enough money for a down payment. If you borrow from the trust, you will need to disclose that to your lender, which could complicate your loan approval and closing. Instead, I suggest you go and buy your home with what you have. Start building equity. At some point in your life, you’ll come into more money, either because you’re earning more or you’re receiving funds from the trust. At that time, you can either pay off your mortgage, take a big trip, pay your children’s college tuition or, if there’s enough in the trust, live off of your interest.
Once you take borrowing money from the trust off the table, you and your siblings should approach your mom and ask to sit down with her estate attorney to go through her estate plan. Tell her you’re starting to put yours together and want to make sure it aligns with her plans. If you approach her casually, and with love and care, she may agree. I hope so. My mom was widowed at 45 (I was 18) and my sisters and I became her sounding board over the years as she built up her real estate business and started investing her earnings. We always knew what she had, where her papers were located, and who her “people” were. We knew what her end of life wishes were, and we all were her powers of attorney. She trusted us to help her when she could no longer do for herself. I hope that’s how this works out for your family.
—Ilyce
Classic Prudie
My boss calls me Elaine. My name is Eileen. He doesn’t catch it himself, but whenever I or someone else corrects him, he quickly apologizes and gets it right… until the next time we speak.