“I want to keep the family home, but I have a 3.25% interest rate, and I don’t want to lose it!”
Divorcing homeowners often fixate on losing a low-interest mortgage rate. However, the real focus should be on their overall financial picture and monthly cash flow.
Real-Life Example:
Sally loves her family home and wants to keep her children from moving. She has a 30-year fixed mortgage with a 3.25% interest rate on an original loan amount of $500,000, resulting in a monthly principal and interest (P&I) payment of $2,176. To refinance the current balance of $400,000 plus a $50,000 equity buy-out to her husband, Sally’s new interest rate would be 7% on a 30-year mortgage, increasing her P&I payment to $2,994. That’s a monthly increase of $818—a significant shock.
If the mortgage were Sally’s only debt, her focus on the interest rate would make sense. But what if she also has a $650 monthly car payment on a $25,000 loan balance?
Strategic Divorce Mortgage Planning:
Through strategic divorce mortgage planning and negotiations, suppose a settlement is reached where Sally retains the marital home, pays her husband a $75,000 equity buy-out instead of $50,000, and her ex-husband pays off the $25,000 car loan.
Benefits for Sally:
Sally’s new loan amount would be $475,000 at a 7% interest rate, making her monthly P&I payment $3,160. Without the $650 car payment, her total monthly debt obligations would initially be $2,826 (mortgage + car loan). After the refinance and equity buy-out, her new monthly obligation would be $3,160, a net increase of $334/month instead of $818/month.
Future Financial Flexibility:
Mortgage interest rates fluctuate, and Sally might further improve her cash flow if interest rates decline in the future.
Importance of Divorce Mortgage Planning:
This example underscores the importance of integrating divorce mortgage planning into negotiations and settlements. Involving a Certified Divorce Lending Professional (CDLP®) can help structure scenarios that improve financial outcomes. Specific language in the marital settlement agreement, facilitated by a CDLP®, and cooperation from all parties are crucial.
Comprehensive Home Equity Solutions:
Incorporating divorce mortgage planning into the settlement process results in better outcomes for both spouses and their families. Divorce mortgage planning involves evaluating mortgage options within the overall financial objectives of the divorcing couple.
- Improving cash flow and retirement income
- Identifying strategic financing opportunities
- Mitigating potential capital gains taxes
- Protecting the mortgage interest deduction
- Increasing qualified income through collaboration
Achieving a Successful Divorce:
A successful divorce settlement involves piecing together a plan where both spouses emerge whole or on the road to recovery. This requires a solid divorce team.
The Role of a CDLP®:
The marital home and mortgage financing are often contentious issues in divorce, especially when income from the divorce is needed for mortgage qualification or when court-ordered debt assignments exist, such as a jointly held mortgage. A CDLP® brings invaluable knowledge and a unique perspective to the divorce team, ensuring better solutions.
Conclusion:
Working with a Certified Divorce Lending Professional (CDLP®) integrates divorce mortgage planning into the overall process, combining family law, financial and tax planning, real property, and mortgage planning. This comprehensive approach ensures the best outcomes for divorcing homeowners.
How are you integrating divorce mortgage planning into your case management?
Involving a Certified Divorce Lending Professional in the negotiation process will bring the opportunity for strategic solutions to the table such as this. A CDLP® can provide clarity and suggested language in the settlement agreement to avoid hiccups with the mortgage loan process when an equity buy-out or new purchase loan is required.
This is for informational purposes only and not for the purpose of providing legal or tax advice. You should contact an attorney or tax professional to obtain legal and tax advice. Interest rates and fees are estimates provided for informational purposes only, and are subject to market changes. This is not a commitment to lend. Rates change daily - call for current quotations.
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