Archive for Friday, November 13, 2009

Weigh pros and cons before co-signing loan

November 13, 2009


Our daughter and son-in-law have asked my husband and me to co-sign their loan application so they can buy their first home. We would like to help them, but we wanted to get some feedback from you first. What are the legal ramifications here? Are there any special risks involved in co-signing?

Millions of parents co-sign a loan application for their grown children every year. It’s a generous gesture, but it can be a risky one, too.

When you co-sign for a loan, you essentially agree to make the monthly payments if the primary borrowers can’t or won’t make them on their own.

But if you can’t make them either, the bank can foreclose on the kids and may even be able to sue you to recover any losses.

Not only would that prove costly, but it also could hurt your own credit rating.

I’m sure that your daughter and son-in-law have every intention of making all of their future payments themselves, but there are a number of factors that could prevent them from doing so. The loss of a job, a disability or an unexpected divorce several years from now are just a few of the problems that may leave them unable to pay their mortgage bills and put you on the hook to make them yourself.

Also realize that co-signing their application could affect your own ability to borrow money later. That’s because co-signing is a legal obligation to ensure that a debt is repaid: If you ever plan to buy another house or refinance your current loan, your lender could choose to take that obligation into consideration when it reviews your own application and thus reduce the amount of money it will lend to you.

Again, co-signing for a grown child’s mortgage is a magnanimous gesture, and millions of parents have done it without incident.

I’m not trying to talk you out of it, but it’s important to weigh all the pros and cons before you put your own John Hancock on their loan application.

I saw a report on TV that said natural gas prices are dropping, so it won’t cost as much for most people to heat their homes this winter. Unfortunately, most homes in my area are warmed by heating oil instead of gas, and the report said that the cost for the oil is rising. Would it make sense to swap my oil-burning furnace for one that operates on natural gas?

It’s true — the Energy Information Administration forecasts that the recent drop in natural gas prices could trim up to 22 percent off a typical homeowner’s heating bills in the months ahead, but a spike in heating-oil costs could add as much as 18 percent to the bills of those who have oil-burning furnaces.

Despite the discrepancy in costs, it probably wouldn’t pay to convert your oil furnace to a gas-fired one.

That’s because conversion expenses can easily top $5,000, so it would take several years to recoup your upfront costs even if prices for natural gas remain stable.

Consider making the switch only if you’re in the market for a new furnace anyway, if you expect to stay in the home for several more years or if you live in a community where local utilities offer to subsidize such conversions.

When our golden retriever tore up our neighbor’s prize-winning rose garden a few years ago, our homeowners insurance paid nearly $600 to replant it. Now our dog has passed away, and it will cost about $750 to replace him with another purebred. Can I file another claim for the cost of the new puppy?

Probably not. A standard homeowners policy doesn’t provide coverage for the cost of treating a sick pet or replacing one that dies.

Some professional breeders purchase a special type of insurance that will pay them if their dogs get sick, die or are unable to reproduce.

But if you don’t have such a policy, your request to be reimbursed now that your pet has gone to “doggie heaven” doesn’t stand a prayer of being fulfilled.

If I form the type of inexpensive living trust that you often write about, would I still need to prepare a will?

Yes. Living trusts are increasing in popularity because they allow the assets of the trust-maker to pass quickly to the heirs without going through the costly and time-consuming probate process.

But you should still prepare a will even if you create an inexpensive trust, in part because a will is needed to distribute the assets that you intentionally or mistakenly leave out of your trust.


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