Your Mortgage : Co-Signing Loan Puts Credit on the Line : Mailbag: A parent wants to know the consequences of co-signing her daughter's home loan. Another reader asks if now is the time to refinance.


Recent columns about co-signing loan applications and putting together equity-sharing deals have generated lots of questions from readers, while others are asking whether it's a good time to refinance their mortgage.

Like so many parents, Barbara Johnson of Orange wants to help her daughter and son-in-law buy their first home by co-signing for the loan.

"What are the legal ramifications of this?" she asks. "If they don't make their payments, can the lender come after me?"

Yes, folks who co-sign for their kids can be liable if the children don't keep up their end of the bargain.

"Co-signing for anybody is a serious step that you can't afford to take lightly," said Bob O'Toole, a lending expert with the Mortgage Bankers Assn. of America.

If the children defaulted on the loan, O'Toole said, the lender would likely foreclose on the property.

But if the home couldn't be sold for an amount high enough to pay the loan in full, both the children and their parents could be tapped to make up the difference.

"Mom and dad's credit rating would get a black-eye, too," O'Toole said. "It's OK to co-sign for your kids, but just make sure you know what you're getting into."

With prices in so many of the nation's housing markets sky-high, a growing number of people are teaming up to buy homes through equity-sharing.

In a typical equity-sharing deal, one person--the "owner/investor"--puts up most or all of the down payment. The other person, known as the "owner/occupant," makes some or all of the monthly mortgage payments.

Profits and mortgage-interest deductions are split according to their wishes. The investor might also be able to take depreciation deductions on his half of the house because a portion of it could be considered rental property.

John Phillips, who reads this column in the Indianapolis Star, is pondering an equity-sharing venture with his brother. He asks: "What are the tax rules that guide this type of transaction?"

Perhaps the most important tax rules concerning equity-sharing agreements are contained in provision 280A of the Internal Revenue Service code.

For either party to qualify for deductions, 280A mandates that the equity-sharing agreement must be in writing and that at least one of the parties must use the home as his primary residence.

The IRS also says that each party must have an ownership interest in the home that will last for 50 years.

You don't actually have to keep the property for half a century: It's just that the term of the contract must be for at least 50 years in order for both parties to take all their deductions.

The trickiest part of 280A is that the person who lives in the home must pay the owner/investor "fair-market rent" for the portion of the house that the owner/investor owns. If you don't meet this test, some of your deductions can be disallowed.

Since equity-sharing involves important tax and legal issues, it's a good idea to get the help of both a tax expert and a real estate attorney before you enter such an agreement.

Bob Gonzalez of Los Angeles says he's got a $155,000 adjustable-rate mortgage that currently has an 11% rate. "My bank is offering me a 10% fixed-rate loan," he writes. "Would it be a good idea to refinance now?"

From a financial point-of-view, it probably doesn't make sense to refinance now.

As a general rule, it usually only pays to refinance if the rate on the new loan is at least two percentage points below the rate that you're currently paying.

That's largely because refinancing often entails thousands of dollars in up-front fees--for points, an appraisal, processing charges and the like.

There are a few exceptions to this rule. For example, if you plan on living in the home for several more years, the money you'd save each month by refinancing at the lower rate could offset the cost of setting the new mortgage up.

Or, if you have a "convertible" adjustable-rate mortgage that will let you switch to a fixed-rate loan for just a few hundred dollars, now might be a good time to do it.

You might also want to refinance if you're simply tired of having your payments change every time the ARM is adjusted.

"I think rates are going to drop another quarter-point to half a point between now and the start of next year," said Fred Flick, an economist with the National Assn. of Realtors.

"But waiting for those lower rates doesn't make sense if you can't sleep at night knowing that your current payment is subject to change."

For a more detailed explanation of how to figure if it's time to refinance, see Page K2.

Dan Moreno of San Diego is a veteran looking for a mortgage, but he doesn't like the 10% rate his banker wants to charge for a Veteran's Administration loan. Instead, he's seeking one of the 8% fixed-rate loans offered by the California Department of Veterans Affairs.

"However, I need a loan of $165,000, but the maximum Cal Vet loan is $125,000," he writes. "Can you think of anything that I can do?"

Assuming that you don't have enough cash to make up the $40,000 difference between the loan you need and the Cal Vet loan you can get, your best bet is probably to take out the $125,000 loan from Cal Vet and get a conventional second mortgage for the rest of the needed financing.

For example, if you got a 30-year Cal-Vet loan for $125,000 at the current rate of 8%, your monthly payment for principal and interest would be about $917.

If you got the remaining $40,000 in financing with the help of a second mortgage at the going rate of about 11 1/4%, your monthly payments on the second would be $461. So, your total payment on both the first and the second mortgages each month would be $1,378.

If you instead opted to take out a VA loan for $165,000 at the current rate of 10%, your monthly payment for principal and interest would be $1,448. That's $50 a month more than you'd pay through a combination of a Cal-Vet first mortgage and a conventional second.

In addition, you'd save hundreds or even thousands of dollars in up-front fees because the cost of setting up the Cal Vet loan and the second mortgage may be well below the costs involved in taking out the VA loan.


Average rates for residential mortgages as of June 22, 1990.

Survey Conventional Mortgages Adjustable Mortgages Area 15 Year 30 Year Composite 1 Year Composite California 10.17% 10.39% 10.29% 8.55% 8.53% Connecticut 10.02 10.23 10.14 8.47 8.67 Wash. D.C. 9.80 10.08 9.95 8.11 8.52 Florida 9.96 10.23 10.10 8.35 8.40 Mass. 9.97 10.24 10.11 8.56 8.84 New Jersey 9.92 10.19 10.07 8.30 8.71 N.Y. Metro 10.02 10.26 10.16 8.46 8.78 New York 10.13 10.36 10.26 8.58 8.87 N.Y. Co-ops 10.51 10.61 10.60 8.66 8.95 Pa. 9.72 10.01 9.78 8.02 8.17 Texas 9.73 9.98 9.87 8.33 8.42 Nationwide 9.95 10.19 10.08 8.40% 8.68

SOURCE: HSH Associates

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