Ask Dr. Don By Don Taylor, Ph.D., CFA • Bankrate.com
Today, Dr. Don discusses converting
a construction loan; and coping with divorce-related credit problems.
Converting a construction loan
Dear Dr. Don,
We have a construction loan on a home that my husband and I built.
Since we built the home ourselves, we have a lot of equity in the
home. Do you think we should get a mortgage on the home or use an
equity line to pay off the construction loan? Jill Tradeswoman
Dear Jill,
You should take out a mortgage to pay off the construction loan.
Construction loans aren't meant to be a method of long-term financing.
A first mortgage is a better choice than a home equity loan because
you can borrow for longer time periods, generally at a lower interest
rate. A typical home equity loan is a second mortgage. It carries
a higher interest rate than a first mortgage because there is more
risk to the lender. That's because the first mortgage has to be
satisfied before any sale proceeds go toward satisfying the second
mortgage. With no other lender having priority in the event of foreclosure,
you've given the home equity lender all the benefits of being the
primary lender. Ask yourself, "What's in it for me?" It comes down
to the loan terms. You should get better terms on a first mortgage
than you would on a home equity loan.
Divorced credit blues
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Dear Dr. Don,
I've been divorced for almost four years. After the usual division
of properties, each of us was to be responsible for our own debts.
My continuing responsibilities include maintaining health insurance
for my ex-spouse. Sometime before the divorce was finalized, my
ex applied for a credit card that deals mainly with the doctor bills.
At the company's request, she supplied them with information about
my insurance benefits and me. She was granted credit, but unbeknownst
to me, I was somehow included as being responsible for this card.
She's been delinquent many times on this card,
and now it's showing up on my credit reports with all the expected
consequences (loss of credit, denial of credit, etc.) I've tried
contacting both the credit reporting agencies and the card company
but nothing gets resolved. I'd like to get this matter straightened
out, but don't know what to do anymore. Another year has passed.
I just requested a credit report from a credit bureau and it has
the same information on it as last year. What can I do? Bitter Bob
Dear Bitter,
Credit bureaus are obligated to correct mistakes in your credit
report. From what you've written it doesn't appear that a mistake
has been made in your report since it's likely that you are as responsible
for the debt as your ex-spouse.
When companies grant credit to a married couple,
they expect the couple to be jointly liable for repaying the debt.
Your problem stems from not closing the account after the divorce.
Closing the account would have stopped the creditor from extending
additional credit on the account. Because you didn't take that step,
the credit extended after the marriage was dissolved will also be
your joint responsibility. Think of it as co-signing a loan for
your ex-spouse. So, if you haven't done it already, close the account.
If the court ordered you to provide health insurance
coverage to your ex-spouse, it's important for you to know who's
responsible for medical bills not covered by the insurance. If you
don't know the answer to this question you need to contact the court
to find out.
Experian (one of the credit bureaus) has a consumer
channel on its Web site that explains credit issues and how you
can start rebuilding
your credit after a divorce. Being delinquent on accounts that
you are jointly liable for will remain on your
credit report for seven years from the date of the reported
delinquency. Your best step in rebuilding your credit is to show
that these claims have been satisfied.
Just because you don't consider this debt to
be your obligation doesn't mean that you aren't obligated. It's
time to get your head out of the sand and figure out how to clear
this up so you can get on with your life. I recommend that you talk
to a credit
counselor to see if they can help you formulate a repayment
schedule.
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