In tough times, getting financial help from family members can be a lifesaver. But there are some caveats.
This week, certified financial planner Walt Romatowski of Castellan Financial Advisors in Roseville answers a reader's question on that topic.
As a member of our "Ask the Experts" panel, he gives advice on personal finances at www.sacbee.com/personalfinanceblog. That's where you can also get advice from our other local experts on taxes, investing, jobs and wills/trusts.
Ten years ago my wife and I bought a three-bedroom home. We're both in our late 30s and recently became unemployed. We owe $90,000 on the house and pay $900 per month, including insurance and taxes. We're thinking of refinancing to see if our monthly payment could be reduced. What is the refinance process? Is it better to pay insurance/taxes separately? Both of our parents are willing to co-sign if necessary since I'm not working. They have also offered to pay off the full amount, then we would pay them back with very low interest. Some other friends are in similar situations so any advice would definitely help us.
I'm sorry about your employment situation. Hopefully, things will improve for you on that front soon.
The refinancing process is similar to what you went through when obtaining your original mortgage. You will be required to provide documentation (pay stubs, bank statements, etc.) of your ability to repay the loan and the lender will review your credit history. In most cases, you will also need to have the house appraised to confirm its value.
Unless you are borrowing 80 percent or less of the appraised value of the home, lenders generally require borrowers to include taxes and insurance premiums in their monthly mortgage payments.
If your parents co-sign on the mortgage loan, it's likely that the lender will require them to be on the deed as a co-owner.
Co-signing on your loan will become a part of their credit profile, which could adversely affect their ability to secure future financing for major items, such as buying a vacation home.
If your parents decide to help you by paying off your mortgage, your obligation to them should be documented, so that everyone is clear on the terms of the loan.
In order to avoid gift tax issues, they must charge you at least the minimum interest rate set by the U.S. Treasury Department. A new rate is announced each month on the IRS website, www.irs.gov.
Because the calculations can get complicated, you should probably seek professional help to draw up the loan documents.
The interest portion of the payments you make to your parents must be reported as income on their tax return, and may be deducted as an interest expense on your tax return.
Even though everyone starts with the best of intentions, mixing family and finances sometimes leads to strained relations. All of you should give this a lot of thought before proceeding.
Compiled by Claudia Buck