“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 may be focused on the wrong thing. In their eyes, they are worried about losing a low-interest rate. When in reality, they should be more focused on their overall financial picture and monthly cash flow.
Here’s an example:
Sally loves her family home and doesn’t want her children to move. There is a 30-year fixed mortgage with a 3.25% interest rate on an original loan amount of $500,000 with 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 with a monthly principal and interest payment of $2,994. That’s a monthly payment increase of $818 and understandably a shock.
If the mortgage was Sally’s only debt to pay each month, it’s understandable why she would focus on the mortgage interest rate. But what if Sally also has a monthly car payment of $650 on a loan balance of $25,000?
Through divorce mortgage planning and negotiations, what if a settlement is reached where Sally can retain the marital home and pay her husband an equity buy-out of $75,000 rather than $50,000, and her ex-husband is to pay the car loan balance of $25,000?
How does this help Sally?
Sally’s new loan amount will be $475,000 at an interest rate of 7% with a monthly principal and interest payment of $3,160, but now she has no monthly car payment of $650.
Her starting position was a monthly P&I payment of $2,176 plus a car payment of $650, totaling her monthly debt obligations to $2,826. After the refinance and equity buy-out of $75,000, her new monthly debt obligation is $3,160. The net effect on Sally’s cash flow is mitigated to an additional $334/mo. rather than $818/mo. with a straight refinance and $50,000 equity buy-out.
Mortgage interest rates will continue to fluctuate as they historically do, and Sally may be able to improve her cash flow even further should interest rates decline in the future.
This is a classic example of integrating divorce mortgage planning into divorce negotiations and settlement. Involving a Certified Divorce Lending Professional (CDLP®) during the negotiation process will often help mitigate and even improve the potential outcome. Structuring this type of scenario will require using specific language in the marital settlement agreement with the help of a CDLP® as well as the cooperation of all parties involved.
Home equity solutions reach beyond the disposition of real property.
Incorporating divorce mortgage planning into the settlement process results in a more positive outcome for both spouses and their families. Divorce mortgage planning is the process of evaluating mortgage options in the context of 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.
What makes a successful divorce?
A successful divorce settlement is a result of putting the puzzle pieces together so both divorcing spouses come out of the divorce whole again or at least on the road to recovery. But how do you get there? By having a solid divorce team, for starters.
The marital home and mortgage financing concerns are often a touchy subject in divorce. Particularly when one spouse is dependent upon income awarded from the divorce for mortgage qualifying purposes or when a court-ordered assignment of debt is present, such as a jointly held mortgage on the marital home. The background knowledge of each team member brings value, different perspectives, and better solutions.
Working directly with the divorce team, a CDLP® incorporates divorce mortgage planning into the overall process with a unique and solid understanding of the intersection of family law, financial and tax planning, real property, and mortgage planning. This is what we do and we do it every day!
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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