 Dear
Dr. Don,
I am going through a divorce and we have the house listed for sale at $499,990.The house is not moving. We owe $300,000 on the mortgage. We planned to split the equity in the house, and my spouse will also get one-half of the marital share of my 401(k) ($180,000). I have $360,000 in the 401(k).
The interest rate on our mortgage is 5.25 percent. My spouse now wants to quitclaim the house to me and have me pay her share of the equity plus marital share of the 401(k) all from the 401(k). Is this prudent, or should I refinance the house instead of cleaning out my 401(k)? I am concerned about forgoing the future earnings of the 401(k) monies but am also aware of the higher interest rates to refinance compared to the current mortgage interest rate.
-- Robert Rejigger
 Dear
Robert,
I don't like her plan. First, you have no real idea of what the house will sell for, but it sounds like it won't be for half a million dollars. You're giving her a sum certain for her equity interest in the house when you have no real idea what her equity interest is in the property.
She can quitclaim her interest in the property to you but that doesn't do anything about taking her name off the mortgage. (I'm assuming her name is on the mortgage.) Lenders aren't privy to a divorce decree so it doesn't change the loan agreement. That means her quitclaiming the deed to you is a bad deal for her because she'll still have a legal obligation to repay the mortgage on a property that she doesn't own.
You may or may not have the income
to qualify for a new $300,000 mortgage on your
own. Bankrate's "How
Much House Can You Afford?" calculator
will give you a good idea if you can qualify for
a new mortgage on your own. While you won't get
5.25 percent, the rate on a new 30-year fixed
rate mortgage is still pretty darn attractive
around 6.43 percent.
Forgoing the future income on the 401(k) monies versus forgoing potential appreciation on the home's value is really too complicated to call. Giving up $85,000 in 401(k) money to be able to capture all the net appreciation on a half million-dollar house -- too tough to call over a longer-term horizon. By the way, I got the $85,000 number by subtracting out a $30,000 real estate commission on a $500,000 sale and splitting the net proceeds.
Holding on to the house after a divorce often turns out to be a financial headache. Make sure that's what you want before agreeing to any deal. Get your attorney and your tax professional involved to keep things fair and equitable.
|
