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Grandparents provide mortgages to offspring in hot market

Realtor Mary Gillach (center) spoke with potential buyers B.J. Rippberger (left) and Tara Rubenstein at a recent open house in Brookline.

Kayana Szymczak for The Boston Globe

Realtor Mary Gillach (center) spoke with potential buyers B.J. Rippberger (left) and Tara Rubenstein at a recent open house in Brookline.

Move over Wells Fargo, Bank of America, and other mortgage lenders, you’ve got new competition: grandpa and grandma.

Not content with the measly rates from bank accounts, certificates of deposits, and other safe havens, some grandparents are getting higher returns by doing real estate deals with their grandchildren who are struggling in today’s red-hot housing market. Some are helping with down payments or related costs. And some are stepping in to completely replace a bank or conventional lender by providing the actual mortgages directly to their grandchildren.

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The grandparents get a double return, of sorts: one in money, from the interest payments on the mortgages, and the second in satisfaction, from seeing the next generation of their family safely into their first homes.

“They treat it as almost a business investment, not just a gift,” said Mary Gillach, a real estate agent at the Gillach Group, a Chestnut Hill firm associated with William Raveis Real Estate. “Grandparents want to help their grandchildren obtain the benefits of owning their own homes. So they help in a number of ways.”

To be sure, the number of grandparents providing mortgages to their grandkids is small, though growing. More common are modest loans or gifts for down payments or closing costs, especially at amounts just below the tax-free threshold of $14,000 for “annual exclusion gifts” that don’t have to be reported to the Internal Revenue Service, according to real estate and financial officials.

Kris Callahan, a senior loan officer at Leader Bank in Arlington, often reviews the finances of a first-time home buyers and sees a growing number getting help in various ways from their grandparents, usually in the form of annual tax-free gifts.

“Oftentimes, it’s not all that much, say $5,000 to help with a down payment,” said Callahan. “But $5,000 can mean a lot toward making a down payment in this market. And I’ve seen more of this in recent years.”

‘They carefully reviewed the market in Boston, comparing home prices, and thought it was a good investment in the end.’

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Scott Kaplowitch, a tax accountant at Edelstein & Co. LLP in Boston, said the form of assistance varies from tax-free gifts that are made directly to grandchildren or through trusts set up for them.

And some grandparents, usually wealthy ones, are also issuing “forgivable loans” to grandchildren, Kaplowitch said.

Forgivable loans work like this: The grandparents lend some sizable amount toward the house purchase, with loan repayment terms similar to those in conventional mortgages from banks. Then, using the annual exclusion limit of $14,000, the grandparents “forgive” a portion of the loan each year, reducing the debt over time.

“After five years or more, you can ‘forgive’ a lot of that original loan, if not all of it,” said Kaplowitch.

However, he cautions that such agreements have to be carefully worded and documented to comply with tax codes and avoid trouble with the IRS.

Thomas Grimshaw, a realtor at Gibson Sotheby’s International Realty in Boston, said he was involved in one sale in which the grandparents of a young woman helped her buy a Beacon Hill condo for more than $450,000. They provided her with a family-financed loan with very strict and defined terms.

“The grandparents really put her through the paces,” Grimshaw said. “They carefully reviewed the market in Boston, comparing home prices, and thought it was a good investment in the end. To them, it wasn’t a handout, but a business decision.”

The grandparents will be getting a return on their investment from interest payments. And if for whatever reason, the granddaughter doesn’t make her payments, they still have a solid condo investment, which they can later either sell or rent out to others, Grimshaw said.

Some grandparents who help with mortgages even show up at home inspections to make sure they’re making sound investments, Grimshaw said.

But sometimes the financing behind such deals can become very complicated.

For instance, some grandparents may own properties that they bought years ago as an investment, and cash those out to help finance their grandkids’ purchase. Under the federal 1031 tax exchange rule, grandparents can avoid paying capital gains taxes on the sale of their investment if they reinvest the proceeds back into real estate — their grandkids’ new home.

“It becomes a real investment strategy for them,” said Gillach, the real estate broker from Chestnut Hill.

Gillach said she also sometimes sees grandparents at open houses or home inspections “to make sure they’re getting a good investment.”

“They truly want to help their grandchildren,” said Gillach. “But they want to protect themselves, too.”

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