Parents should think twice before co-signing for a mortgage
Co-signing for a mortgage is a great way for parents to help their kids buy a house, but mom and dad should first consider the potential pitfalls.
Q. Our daughter and son-in-law have asked us to co-sign a mortgage application so they can buy their first home. We want to help, but we thought we should ask you about it first. Do you think we should co-sign?
A. The decision to co-sign is, obviously, entirely up to you. But don't do it until you first consider some possible consequences.
When you co-sign a mortgage application, you become legally bound to make the monthly payments on the loan if the other borrowers -- in this case, your daughter and son-in-law -- cannot make the payments themselves. But if you can't make the payments either, the lender can foreclose on the kids and may even be able to sue you to recover any money it may have lost.
I'm sure your daughter and her husband aren't planning to purchase a house and quickly stop making the payments, leaving you to foot the bill. But I also know several well-meaning parents who have co-signed for an offspring's mortgage and then were financially ruined by circumstances they could never have foreseen -- including the unexpected loss of a job that left the kids unable to pay, or a marriage that ended in a contentious divorce a decade or two later.
It's also important to realize that co-signing for a loan can hurt your own borrowing power in the future. That's because you'll be on the hook to repay the money if your kids don't.
To illustrate, let's say you co-sign for your daughter's mortgage today but then decide to buy a new house or car for yourself a few years from now. The lender who reviews your future application might consider your current legal obligation to repay your daughter's debt and reduce the amount of money that it will loan you.
I am certainly not trying to discourage you from helping your daughter and son-in-law from buying their first home. Just make sure you understand all the ramifications of co-signing for their mortgage.
Real estate trivia: A recent survey by Bank of America found that two-thirds of potential first-time homebuyers ages 18 to 34 expect to get help from their parents. The good news is that most of those buyers don't want money or to share mom and dad's credit history; they want their folks to help select the house and then help pack for the move.
Q. We paid almost $6,200 in October for a contractor to install a new central-air/heating system in our home. Because the new system obviously added value to our house, can we deduct the expense on our upcoming tax return?
A. No. Although the new heating system certainly increased the value of your home, its cost cannot be deducted on your April tax return. But keep copies of your installment contract and receipts: You can add them to the "cost basis" of your house, which will reduce or even eliminate any taxes that may be owed on the profit when you eventually sell.
Q. Our youngest son moved out of our house in September to attend college, so my New Year's resolution is to convert his former bedroom into a "man cave" for me and my buddies. Would I save money by buying a new TV for the room now, or should I wait until the Super Bowl comes around?
A. Assuming that your wife has given approval to your man-cave plans, it probably would be best to buy the television now rather than wait until a few days before the big game on Feb. 5. That's because retailers today are anxious to dump their unsold holiday inventory and clear space for the new models that were unveiled at the giant Consumer Electronics Show on Jan. 5.
I have already previewed the 2017 TV sets, and they're not much different from last year's models. Look for savings of 25 percent or more on the 2016 lines in the next few weeks, which will give you plenty of time to install a new television before the first week of February.
January also rings in the start of the traditional "white sales" season, when retailers offer bedroom, bath and kitchen linens at discounts of 30 percent or more.
John Wanamaker, considered by some as the originator of our nation's first department-store chain, is also believed to be the creator of the first white sale in 1878. He discounted prices on thin bed linens, which came only in white back then, because they didn't sell very well in the chilly winter months near Wanamaker's Philadelphia headquarters.
• For the booklet "Straight Talk About Living Trusts," send $4 and a self-addressed, stamped envelope to David Myers/Trust, P.O. Box 4405, Culver City, CA 90231-4405.
© 2017, Cowles Syndicate Inc.