 Keeping
the house through a divorce
|  Dear
Dr. Don,
I am in the middle of a divorce and must buy my ex-husband
out of our home. We live in Rhode Island. The house is in a very desirable location,
three blocks from the beach. The home appraised at $400,000 and would likely sell
for $420,000 to $430,000, but I don't want to sell. The rental market here is
horrible and I couldn't afford to buy anything with my portion of the equity if
we sold.
I am a 37-year-old registered nurse with a $58,000 annual income
and have $30,000 in my 403(b). I have a tenant who pays $650/month
now through next May. At that time I will rent out the main portion
of my home, with an average monthly income of $4,000 for June, July,
August and September so I can expect at least $16,000 next summer
and in following summers for as long as I want or need to rent.
(My daughter and I will live in the efficiency off the house, so
I won't incur extra living expenses).
The mortgage balance is $240,000.
To buy my ex-husband out, I need to pay him about $50,000 to $60,000,
so the refinance would be for approximately $300,000. My taxes,
mortgage and real estate tax payment is $2,045 per month.
With my take-home pay monthly of about $3,200 and the $650 in rental
income, plus $300 per month in child support (which I can't always
rely on), I can swing that. But obviously, the refinance will make
that payment go up significantly. My credit score is in the "low
600's," according to my mortgage broker.
I am thinking that the only real mortgage I can afford
for a refinance is the dreaded "interest only" loan. I
feel like I just need to do something in the interim while I get
on my feet for the next couple of years. I know the housing market
is leveling and interest rates are raising ... NOT a good combo
for interest only. But, what other choices would I have besides
selling and/or moving? Neither is an option at this time for me
or my 5-year-old daughter. I have approximately $140,000 in equity
now and would be left with about $100,000 in equity after a refinance
of $300,000. I feel like that's enough equity in case the market
really drops, especially if I am still paying something extra on
principal.
My idea is to do a fixed rate five- to seven-year,
interest-only mortgage, but put down extra on the principal whenever
I could afford it, especially in the summers with the rental income.
Then I could feasibly keep the house. I would want to be sure that
I didn't have a prepayment penalty, because in reality I don't know
what is on the horizon for me. But I assume that I won't be selling
my home or moving anytime in the next five years since my child
is in the neighborhood school system. My long-range plan would be
to refinance out of that interest-only loan as soon as I could,
maybe in three to five years, before the interest-only term expires.
What advice would give me? Thanks.
-- Rebecca Recast
 Dear
Rebecca,
You've certainly thought through the issues
and know in your mind what you want to do with the house. Holding
on to the house through a divorce is a difficult task. Even though
you earn a nice annual income, with your income and a low credit
score you're going to have trouble qualifying for a $300,000 mortgage
on the home. In your situation, a 7/1 interest-only adjustable rate
mortgage, or ARM, is a reasonable approach to financing the property.
Another difficulty is in being able to use the rental income in
justifying the mortgage. If you rented it out in past summers that
will help your case, or if you have summer tenants lined up already
for next year. Just stating your intent to rent won't do much for
the lender in making the decision to approve the mortgage.
If you're still working on the division of assets
from your marriage, why not offer your husband the $30,000 403(b)
account balance as part of the $50,000 to $60,000 you owe him? If
part of the divorce proceedings, and under the terms of a qualified
domestic relations order, you'll get more bang for your buck than
taking out a loan against the plan, although that is a possibility
as well. I also think that trading an uncertain $300 per month in
child support for a portion of the equity balance would work out
well for both of you, too. Saving $300 per month on the mortgage
payment leaves you with the $300 to spend on your daughter's support.
I can't speak to the feasibility of either approach
in your divorce, but your attorney can tell you if they can work
and how the assets may be valued. As an example; the value, in today's
dollars, of $300 per month for 13 years, assuming 5 percent interest,
is roughly $34,000.
Alternatively, you could cut an agreement with your
ex where you have an obligation to rent the home over the next three
to five summers and you split the net rental income. A little horse
trading of assets and income to keep down the size of the mortgage
is a reasonable approach here for both sides.
Along the
way, work on rebuilding your credit score so when you want to refinance, you'll
be able to qualify for a lender's best rates.
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