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!