Help is available when pursuing the American Dream
We recently spent the weekend with my son Sam. Sam is a junior at IU, this summer he has been asked back for a second internship at a mutual fund company in Cincinnati. As a dad, I am proud of his progress. He is in the school class I feel was most impacted by the COVID pandemic, as the COVID polices occurred during the important transition years of his senior year in high school and freshman year at IU. I think a lot of these young people are just catching up and the whole group deserves a little patience.
During the weekend, Sam was opining about how "the system" was lined up in a way that was making it impossible for young people to "get started" today. While I detected a little "IU cultural bias" seeping into his rant, the points he made were valid. He said taxes were too high, houses were too expensive and interest rates are double the rates I had to pay on our mortgage (actually, close to triple, but he was on a roll). Sam asserted even if he and his girlfriend of two years both got good jobs when they graduated, together they could barely afford a decent house where they want to live.
As I said, he had a lot of valid points, but at the same time points based on a sentiment felt by young people since time immemorial. And since time immemorial young people still view "getting started" in life as finding a job, buying a home and starting a family. Despite the polarizing rhetoric we are exposed to, the American dream hasn't changed.
I agree however, this is a tougher than typical time to get started. American life has gotten expensive. Asset prices for things like homes are inflated, and interest rates have moved higher accordingly. Bills such as car insurance and health insurance have all gone through the roof and gas and food prices are egregious. Something has to give. Our Federal government's system of spend, tax and print is eroding the opportunity for young people to build prosperity. Inflation is a poison that kills optimism.
As a financial advisor, I've been observing other families "launch" young adults into independence for decades. As a parent I've been learning along the way as well. I have come to the conclusion some of these youngsters may need a little more help at this point in time.
Fortunately, there are programs and tax rules that accommodate this need for a little more help. This help can come in a couple different forms all designed to benefit first time home buyers. The primary categories of programs are affordable mortgages designed for lower down payments, cash grant programs that help families working to muster a down payment and tax rules that accommodate parents who may want to help children in buying their first home.
Mortgage programs offered by Fannie Mae and Freddie Mac called Home Ready and Home Possible both offer mortgages with lower than market or competitive interest rates to buyers with only a 3% downpayment. While reasonably good credit is required for both programs, neither require completely stellar credit scores to qualify, making them more applicable to young families.
On the grant side, the National Homebuyers Fund is a non-profit public benefit corporation that assists first time home buyers with up to 5 percent of a home's purchase price. To be eligible for the grant, home buyers agree to live in their home as a primary residence for at least five years. This grant is applied for through a mortgage company.
Other forms of down payment assistance can include community and local government-based cash grants depending on where the family is establishing a home. A list of grant programs can be researched at www.ncsha.org.
IRS rules also allows a tax penalty exception for parents to access an IRA to assist children in a first time home purchase, prior to the parents reaching age 59 1/2. The exception is limited to a $10,000 lifetime maximum per taxpayer, but under this rule a parent can withdraw funds to from an IRA or Roth IRA without incurring the 10% tax penalty on early withdrawals if the funds are used to assist the child with first time home purchase. Depending on the type of IRA, however, the withdrawal may still be taxed as income. This rule does not apply to 401(k) or 403(b) accounts.
So, while the American dream may have gotten more expensive and intimidating in this modern era of inflation, it is still alive. With some help from the government, the community and the family youngsters may find they are still able to chase their dreams and "get started" building their own lives in our still great country.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Stock investing includes risks, including fluctuating prices and loss of principal. No investment strategy can guarantee a profit or preserve against loss. Past performance is not a guarantee of future results. Marc Ruiz is a wealth advisor and partner with Oak Partners and registered representative of LPL Financial. Contact Marc at marc.ruiz@oakpartners.com. Securities offered through LPL Financial, member FINRA/SIPC.
