Retired Son's Plan Puts Parents At Risk

Question: After my son’s wife died, he used the life insurance proceeds to pay off the mortgage on their Gilbert home, and my son took early retirement. My son now wants to take out a home equity line of credit on his home and use the HELOC funds to buy one or two small investment homes. He wants us, however, to co-sign for the HELOC. We are elderly and we do not want to risk our financial security. Inasmuch as my son’s home is free and clear, why isn’t his home enough collateral for the HELOC? Will we be liable as co-signers if the HELOC is not paid?

Answer: First, a lender typically wants sufficient income from the borrower to make payments on any mortgage loan, and the collateral of a home is only a “fall back” for the lender. The reason is that a lender is in the business of making mortgage loans, not owning homes. Therefore, if your son’s “early retirement” will not produce sufficient income for payments on the HELOC, a lender will require a co-signer or guarantor of the HELOC. Second, if you are a co-signer, you are guaranteeing payment of the HELOC, and you will be personally liable if your son defaults. Therefore, I would suggest that you tell your son that you do not want to risk your financial security for his proposed investment plan.