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Columns: Dr. Don
Don Taylor, Ph.D., CFA, CFP   Expert: Don Taylor, Ph.D., CFA, CFP
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Co-signing means taking a risk a lender won't
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Don't co-sign for son's mortgage

Dear Dr. Don,
Our son has asked us to co-sign on a home loan for him. He will have no down payment and is able to afford a $1,400 monthly payment. He has been advised to do a negative amortization loan. This, however, seems risky to us. Are there better alternatives? Thank you.
-- Dotti Duplex

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Dear Dotti,
When it comes to co-signing, I like to quote the FTC Facts for Consumer Publication, "Cosigning a Loan." It states: "When you're asked to co-sign, you're being asked to take a risk that a professional lender won't take. If the borrower met the criteria, the lender wouldn't require a co-signer." The publication is required reading for anyone thinking of co-signing a loan -- even if the loan is for one of your children.

Let's talk about the mortgage that your son is being advised to take on. A negative amortization mortgage means the loan balance goes up if the monthly payment isn't enough to cover the interest expense. The loan payment may be flexible, but the interest expense isn't.

Your son wants to buy a house with no money down with a mortgage that will let the loan balance grow? Bad idea, especially since after a while the loan payment is recast to a higher amount based on the growing loan balance.

My best advice is for your son to work on improving his credit score, start saving to accumulate a down payment and try to find a house he can afford with conventional financing. Taking these kinds of chances with his, and your, finances just doesn't make sense.

Bankrate.com's corrections policy-- Posted: July 6, 2007
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