Q: 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 would 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 pay them back with very low interest. Some other friends are in similar situations so any advice would definitely help us. Thank You. -- Martha, Sacramento
A: Sorry about your employment situation. Hopefully, things will improve for you on that front soon.
The refinance process is similar to what you went through when obtaining your original mortgage, i.e., you will be required to provide documentation of your ability to repay the loan, e.g., pay stubs, bank statements, etc., and the lender will review your credit history and have the house appraised to confirm its value.
Unless you are borrowing 80% 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 loan, it's likely that the lender will require that they also be on the deed as a co-owner. Co-signing on your loan will become a part of their credit profile, and may adversely impact their ability to secure financing for major items, e.g., vacation home, etc.
If your parents decide to help you out 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 Treasury Department. A new rate is announced each month and can be found here.
The calculations can get complicated and 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 interest expense on your tax return.
Even though everyone starts with the best of intentions, mixing family and finances sometimes leads to strained relations. You should all give this a lot of thought before proceeding.