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Should You CoSign On Your Kid’s Mortgage? The Crucial Questions To Ask Yourself

If your child is looking to buy a house and can’t qualify on their own, you may have thought about consigning on a loan. “It can be a brutal world out there, and you want to help someone you care about. That’s a perfectly reasonable argument,” said US News.

But have you examined the potential consequences of this action? Your good intentions could end up costing you, so you might want to ask yourself a few key questions before you sit down at the closing table.

What’s the plan?

It’s a good idea to examine the goals here – both yours and the recipient of your kindness. Is this house a long-term investment that will be on your credit for a long time? A short-term thing that’s only intended to help establish credit for your child? A moneymaking venture that could pay off for both of you after you flip the house? Knowing the plan can help you make the best decision.

Is your child responsible?

What have you observed about your son or daughter’s financial responsibility. Do they have a lot of outstanding credit they’re not managing well? Do they regularly borrow money without paying it back? Do they buy a lot of unnecessary items instead of being more prudent with their money and establishing some solid savings? These could all be red flags.

What is your financial commitment?

If your child needs a cosigner, does that also mean they need help with the down payment? If your money is going to be tied up in this home purchase, you’ll want to establish ground rules from the beginning. Is it a gift or a loan? If it’s a loan, what are the terms? What if he or she defaults? If your name is on the mortgage, the responsibility to pay may fall to you.

Why-You-Should-Never-Cosign-for-Your-Kids

How important is your credit to you?

Your credit is going to take a bit of a hit with the addition of a new mortgage.

“The loan appears on your credit report, and the monthly loan payment factors into your debt-to-income ratio – regardless of whether the primary applicant makes the payment each month. Because you’re liable for this balance in the event of default, being a cosigner can decrease your ability to get new credit,” said Money Crashers. “But this isn’t the only consequence of a higher debt-to-income ratio. Cosigning a loan can also lower your credit score because the amounts you owe makes up 30% of your FICO score. Thus, the more debt you have, the lower your credit score. Ideally, your debt-to-income ratio should be no higher than 36%, as your credit score will drop as your debt approaches or exceeds this percentage.” But the real danger is, again, in the possibility of your child defaulting on the loan.

“The bank wants to have someone on the hook in case a loan is not repaid; if you cosign a loan, you’re that person who is on the hook,” said GO Banking Rates. “So if your child doesn’t make his loan payments, you will be expected to do so – or risk suffering the impact of a defaulted loan on your credit score.”

Will two mortgages be a hardship?

Cosigning for a loved one could prevent you from doing the things you want to do, like buying a new house for yourself, refinancing, or even buying a car. “One potential downside for parents is that the mortgage will show up on their credit as an outstanding loan obligation, which could complicate refinancing or buying another home in the future,” said US News.

There may also be additional impacts to your finances you hadn’t considered. “You should consult a financial advisor first to make sure you can comfortably afford to help without jeopardizing your financial security,” they said. “You may also want to consult your tax preparer about potential tax implications, and, depending on the circumstances, ask a lawyer how to structure the legal paperwork in case your child divorces a spouse or defaults on the loan. Nobody plans on things going awry with real estate transactions, but it can happen, so it’s best to be prepared.”

How’s your relationship?

“Another important risk to consider with a cosigned loan is the effect it could have on your relationship with your child,” said GO Banking Rates. “Animosity can result from late payments or, even worse, defaulting on the loan.”

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What’s your goal?

If you’re simply looking to lend a hand, well, first of all, that’s super nice of you. Homeownership is still the American dream, and helping someone else’s come true is awesome. But, is putting your credit at risk really the best plan?

There may be much better ways to help, like:

Gift a down payment – just make sure you know the tax implications.

Put the house in your name and rent it to your child – if you have the financial wherewithal and the goal is simply to provide a safe place to live, this might be a better solution. You can always pass the home along at the later date by providing seller financing.

If you choose to go ahead with cosigning, take precautions. There are steps you can take to help protect yourself, like using the tools provided by the lender to set up alert when payments are due, overdue, and when they’re posted, and setting up direct debit so payments are automatically made at the same time every month.

Position Realty
Office: 480-213-5251

How To Pay Off Your Mortgage Faster

42% of Americans Say Their Mortgage Is The Debt They Most Want to Eliminate

A mortgage is often the largest debt that one undertakes and as a result, many homeowners look to pay it off as soon as they can. In addition to reducing overall debt, paying off your mortgage early enables you to purchase a second home or investment property. Try one of these strategies to reduce your mortgage principal.

  • Make bi-weekly mortgage payments
    Bi-weekly payments involve 26 half payments each year instead of the standard 12 full payments. By making 13 full payments each year, you’ll pay down the principal sooner and reduce the amount of interest you’ll pay over the long run.
  • Increase your mortgage payment
    You can also increase the amount you pay towards the principal of the payment each month. Most people have higher incomes a few years into their mortgage than they did when they first took it out. Keeping your payment on par with your increases in income will help reduce your mortgage amount significantly and may also reduce the amount of your monthly payment over time.
  • Make additional payments
    If bi-weekly payments or increase your monthly mortgage payment are not feasible, try to make extra payments when you can. If you have extra money at the end of the year, put it toward your principal.
  • Refinance with a shorter-term mortgage
    If you have a 30-year mortgage, you can refinance the loan for 10, 15, or 20 years. While the payments will be higher each month, you’ll be able to pay the loan off much sooner.

1 in 3 homeowners own their home free and clear.

If you’re considering paying off your mortgage early, consider the following:

  • Do you have the cash available to pay down the debt? If you’re accumulated 6 months in emergency reserves and have paid off other loans and credit cards, your mortgage should be the next debt you target.
  • Will you have enough cash to save for retirement and other financial goals?
  • How long do you plan to stay in the home? It may make more sense to keep your money liquid and not tied up in a home you might sell in a few years.

Position Realty
Office: 480-213-5251

Borrowing Costs Ease Slightly This Week

Fixed-rate mortgages dropped slightly from the previous week, holding near yearly lows, Freddie Mac reports in its weekly mortgage report.

Mortgage Trends:
Freddie Mac released the following national averages with mortgage rates for the week ending Sept. 25:

  • 30-year fixed-rate mortgages: averaged 4.20 percent, with an average 0.5 point, dropping from last week’s 4.23 percent average. Last year at this time, 30-year rates averaged 4.32 percent.
  • 15-year fixed-rate mortgages: averaged 3.36 percent, with an average 0.5 point, dropping from last week’s 3.37 percent average. A year ago, 15-year rates averaged 3.37 percent.
  • 5-year hybrid adjustable-rate mortgages: averaged 3.08 percent, with an average 0.4 point, rising from last week’s 3.06 percent average. Last year at this time, 5-year ARMs averaged 3.07 percent.
  • 1-year ARMs: averaged 2.43 percent, with an average 0.4 point, holding the same as last week. A year ago, 1-year ARMs averaged 2.63 percent.

More Borrowers See Mortgage Payoff Possible

More borrowers are shortening their mortgage terms, and are considering paying off their mortgage a possible feat. Record low interest rates has allowed more borrowers to refinance their loans from 30 years to 15- or 20-year terms.

A recent Freddie Mac report shows that 31 percent of recent refinancers shortened their loan terms, which is the second highest level since 2002.

“Historically low rates and an average three-quarters of a percentage point difference between 30- and 15-year mortgage fixed-rate mortgages are important drivers for moving to a shorter term,” Frank Nothaft, Freddie Mac’s chief economist, told The New York Times.

Fifteen-year fixed-rate mortgages reached a new record low last week, averaging 2.97 percent, according to Freddie Mac’s weekly mortgage market survey. The 30-year fixed-rate mortgage also reached a new record low last week, averaging 3.75 percent.

People are paying off their mortgages at a faster rate because they feel the real estate market is improving and real estate prices are increasing once again. Before no one wanted to pay down their mortgage when every month they were losing equity.

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