Home Equity and Divorce

[Paolo Scamardella]

Hello everyone,

Unfortunately, I'm going through a divorce, and I need to either sell the house or pay my ex out. I have been reading a lot about investing, and even though I'm going through some tough times, I think this is the perfect chance for me to get started in investing in real estate. My ex was all about saving. With inflation, that is not a good idea. I'm on the investing side. I rather give it my all, try, and fail rather than save money.

My Current Scenario:

1 - I bought my house at 300k.

2 - The value of my house is around 440k. 

3 - The current balance of the home is 224k. 

4 - My current interest rate on my house is at 4%. 

5 - I owe 72k to my ex. 

6 - If I refinance the house, she only gets 72k because it was based on the appraisal at the time of filing of the separation.

7 - If I sell the house, she gets over 100k.

I have talked to 3 local banks, and if I want to do a cash out refinance, the interest rates that they are willing to offer are between 5.75% and 6.375%. Obviously, the interest rates are higher, it will take my ex-wife off the mortgage, and the monthly payment will be higher.

I asked them for 3 possible scenarios:

1 - Take out 75k (just to pay off my ex-wife) - Interest Rates offered by the local banks (5.75%, 5.875%, 5.99%)

2 - Take out 100k - Interest Rates offered by the local banks (5.75%, 5.875%, 5.99%)

3 - Between 113k - 127k (Take out the 80% of LTV - Extra Money to Invest) - Interest Rates offered by the local banks (5.75%, 6.373%, 6.373%)

Let's say I get 127k from a cash out refinance. That would be 127k - 72k = 55k to invest + own current property.

If I sell the house, it would be 440k - 224k = 216k. The I need to divided by 2 (half to ex), which is 108k with no property.

I also had one of the banks that would offer me a Home Equity Loan.

He said that the bank is willing to give me 80% of LTV for a 30 year fixed rate at 4.44%.

According to him, this will replace the old mortgage with a new one and get my ex off of the mortgage.

I'm familiar with HELOC and Cash-Out Refinance... not so much with Home Equity Loan. I did some research on Home Equity Loan, and it looks like a Home Equity Loan does not replace your existing mortgage but creates a second mortgage on the house. I'm not sure why he is saying it will remove the old mortgage. I need to ask him that to confirm it.

There are pros and cons to each scenarios:

1 - Selling the house would give me more cash in my pocket, but I would need to start from zero when it comes to investing. I think I can wait for 6 months to a year to tap into my equity to invest in other properties.

2 - With Cash-Out Refinance, it would give me less money in my pocket, a higher interest rate, and an increase in my monthly payment. However, I would still have the house, and I could house hack it and rent out 2-3 rooms. That would cover my monthly payment, and also, I could take the 55k and invest in another property(ies).

3 - With Home Equity Loan, the interest rate is lower than the Cash-Out Refinance. It may or may not replace the existing mortgage. I can do the same thing with house hacking and have 55k extra to invest.

My questions are:

1 - Which one is the best solution for my scenario? What would you do? If it replaces the existing mortgage, then I'm leaning towards Home Equity Loan.

2 - What would happen if the market crashed, and all of a sudden, the value of the house was 300,000? I'm stuck with a mortgage of 440k? I wouldn't be able to sell it at that price. At that point, I would rent it out and hope for the best.

If this is too much, I'm sorry!

Thanks in advance!

[Chase Busick]

Hi @Paolo Scamardella, nothing to be sorry about as you were very detailed with your current situation and gives everyone some insight into some of the options you've already done. I had kinda been in a similar situation as you a while back.

The home equity loan would be a 2nd mortgage and secured by the home tapping into some of the equity. This would most likely be a cheaper option and you'd be able to keep the home. The biggest thing is if you'd be able to remove your ex from the loan.

The cash out refinance is another option, and seems like you have a good idea on it.

Depending on where you live, will determine how big of a crash there may be (but timing is hard to tell on when it will/can happen). Some markets won't be as bad as others, but there is still a huge housing demand and little supply which makes it a little less predictable. Inflation is rising, rates are increasing and bumping some buyers out of the market, & forcing some owners to reconsider their living situations, especially if their income/job hasn't been keeping up with the costs. It is something to consider with potential risks, depending on your location.

One option you can consider is if your loan is assumable, you can most likely assume the loan and remove her from it. This is if the divorce is finalized, and (only) both parties are on the note. You can possibly speak with the lenders you spoke with before to double check if your existing loan is open to it. You could potentially do that then the home equity loan in order to pay her off.

If y'all sell, depending on how long you lived there can avoid paying capital gains taxes if you lived there 2 of the last five years. I think speaking with the lenders again to see. This can depend on what you mainly want to do.