Help your kids, but protect your assets

Q. My son and his wife are expecting their first baby. Theywant to buy a house but don't have enough money for the down payment.They asked me to help them by lending them a portion of what theyneed. I will be retiring in five years, and at that time I will needthe money (or at least the interest) to supplement my income. Whatdo you suggest I do?

A. I'll lay out the facts, but the choice is yours. Whatever,proceed very carefully.

First, have your son and his wife explore all other options?Will the seller of the house accept a contract? Are they entitled toa Veterans Administration loan or a Federal Housing Administrationloan? Have they looked into state-sponsored first home mortgages?Can they borrow the money from another source if you agree to cosigna loan?

If they can get the money elsewhere, you are off the hook. Butkeep in mind that cosigning a loan makes you legally obligated forpayments.

Even if they can't borrow elsewhere, the process of looking andasking in itself should help them better understand the cost of moneyand the difficulties of obtaining loans.

Next, consider your own financial situation. If you did not getyour money back, how would your lifestyle be affected?

If you go ahead, proceed the way a banker would. Keeping itcasual would be no favor to anyone - and can lead to bitter feelings.

Have a lawyer draw up a formal loan agreement. It shouldinclude: a signed promissory note, a payment schedule, a descriptionof interest charges, penalties for late payments and perhaps even alien on the house. If you structure the lien as a second mortgage,it shouldn't hurt their chances of getting a first mortgage, and theinterest they pay to you will be tax-deductible to them.

You are entitled to a reasonable rate of interest on yourhard-earned money. Here are some examples that are fair for bothsides: 1 percent above prime. 1 percent above what you could earn on the money. 1 percent below the going rate for mortgages. 5 percent below what they would have to pay for an installment loanfrom a bank.

Last but not least, consider asking your son to buy term lifeinsurance and/or disability insurance for the amount of the loan.That doesn't sound pretty, but it can be important protection - andit is quite inexpensive.

I am not trying to discourage you from helping your loved ones.Rather, I am urging you to protect the relationships you value andthe assets that are earmarked for a very important purpose - yourretirement.