Adoption loans: How to finance your adoption

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In a Nutshell

Adopting a child can be expensive, but taking out an adoption loan may help cover the costs. Other options, like employer benefits and tax credits, can also make adoption more affordable.

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If you’re planning to adopt a child, taking out an adoption loan may help to cover the costs.

Adoption expenses may fall between $20,000 and $45,000 for adoptive families who go through a private adoption agency, according to a November 2016 Child Welfare Information Gateway fact sheet. Costs can be even higher for international adoption.

Adoptive parents may need to pay for things like a home study (a review of your home environment), along with legal fees, travel, education or training, and medical care for the birth mother, if applicable.

Although these costs can be significant, you have a number of options to look into if you decide to finance an adoption.

Adoption financing options

There are several possible choices for financing an adoption, each with its own pros and cons.

Personal loan

You can apply for a personal loan from a bank or credit union, or you can apply for a low-interest or no-interest loan from an organization that supports adoption. Some organizations that provide these types of loans are the Oxford Adoption Foundation, Lifesong for Orphans, ABBA Fund, A Child Waits Foundation and Hebrew Free Loan. A number of banks and adoption support organizations offer personal loans for adoption that are unsecured, meaning you don’t have to pledge your home or other property as collateral.

Keep in mind that a low-interest or no-interest adoption loan may save you money on interest. But these loans may not cover the full cost of an adoption.

And be aware that if you apply for an unsecured personal loan from a lender, you may be charged a higher interest rate than on a secured loan. The loan amount may be low, and you may not qualify for a loan if you don’t have good credit.

Home equity line of credit

If you own a home, you may apply for a home equity line of credit, or HELOC, to pay for an adoption. A HELOC is a form of revolving credit that allows you to borrow multiple times during a set period known as the draw period, as long as you don’t go over your borrowing limit. During this period, you make minimum payments on the amount you borrow.

Once the draw period is over, you can no longer borrow through your HELOC and you’re required to pay back the remaining amount you owe. Depending on the terms of your HELOC, you may need to pay it back immediately, or you may have a repayment period during which you can pay it back.

HELOCs may be attractive because you can borrow multiple times throughout the draw period, and they can be used to cover a variety of expenses over the course of the adoption process.

At the same time, HELOCs have some downsides. You may risk losing your home if you aren’t able to pay the full amount you owe. HELOCs typically have variable interest rates, so your payments could grow over the loan term because of changes in interest rates.

Your lender also can reduce your borrowing limit if your home value goes down. And if you sell your home, you’ll likely have to pay off your HELOC all at once.

Personal line of credit

You may also consider using a personal line of credit, which is an unsecured form of revolving credit like a credit card. Like a HELOC, this gives you the flexibility to borrow repeatedly during your adoption process, but without having to pledge your property as collateral.

You may need an existing relationship with a lender and excellent credit to qualify for this type of financing, though. Check your credit scores to see where you stand before you apply.

You may be able to borrow money from your 401(k) to finance your adoption. While each plan can set its own limits for how much participants can borrow — if they let you borrow at all — the IRS establishes a maximum amount. If you choose to go this route, under the current IRS rules, you can apply to borrow no more than $50,000 or 50% of your vested balance, meaning the portion of the balance that’s owned by you, whichever is lower. If 50% of the vested amount is less than $10,000, some plans allow you to borrow up to $10,000.

You’re typically required to pay back the loan through quarterly payments within five years.

A 401(k) loan may allow you to borrow money if you don’t qualify for other options, and it doesn’t put your home at risk. But it may not cover the full cost of adoption, particularly if your vested balance is low. Taking out a loan from your 401(k) can decrease your account’s earnings and lead to having less money for retirement.

Also, if you fall behind on loan payments, you have to pay income tax and possibly a 10% early distribution tax on the remaining amount you owe.

What are some adoption loan alternatives?

Before deciding to borrow money, see if you can cover some or all of your adoption costs with other methods.

  • Hold a fundraiser. Use a crowdfunding platform like AdoptTogether or GoFundMe, or hold an in-person event like a dinner or a car wash.
  • Apply for adoption grants. Gift of Adoption, A Child Waits Foundation and Help Us Adopt are some organizations that offer grants to adoptive families.
  • Use adoption benefits if your employer offers them. Employers may offer a set amount to help defray the costs of adoption. Others pay some adoption fees or reimburse adoptive parents for a portion of adoption expenses.
  • If you qualify, take the federal adoption tax credit. Adoptive parents who pay federal income tax may be able to receive a one-time tax credit for the year of their adoption.
  • Adopt a child who’s in foster care instead of going through a private agency. Adopting a foster child may be more affordable, and you may be eligible to receive some assistance from the federal government or the state.

What’s next?

If you’re considering borrowing money for your adoption, compare the costs of adoption loans. Make sure you can afford the monthly payments in your budget. Check your repayment terms to see if there are any prepayment penalties if you want to pay off the loan early.

Check your budget to see if you can cover some adoption expenses — like fees for pre-adoption counseling — from your existing cash flow. Also, remember that you’ll need to adjust your budget to include the costs of caring for an additional family member once you adopt. You can estimate these costs with the USDA’s Cost of Raising a Child Calculator.