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!

[Paolo Scamardella]

Hi Trenton,

Thank you for your time and response!

It's pretty clear that I'm not going through the standalone HELOC route. Every lender that I talked to is advising against it because it gives me only one year to pay it off, and that is not going to happen any time soon.

I'm confused with the other type. Are you saying that I can refinance my current mortgage without tapping into my equity, remove my ex from the mortgage, and get a HELOC at the same time? This means that I will have a new mortgage plus a line of credit that acts like a credit card against my house. These are still two separate things, correct? I will have one payment for the mortgage and one more for the line of credit. Is this correct? How long will I have to pay off the line of credit?

Sorry for my ignorance.