home equity

Splitting from wife, want cash from home

Don TaylorDear Dr. Don,
I'm going through a divorce and need to cash out the equity in my home. The house is paid off. I just had it appraised for $191,000. My wife is staying in the house. What is the best way to get the cash out? Do a cash-out refinancing, or take out a home equity line or loan? By the way, I want what is best for both my wife and me, even though we are splitting up.

Thank you,
-- Brian Bachelor

Dear Brian,
Of course, I'm not part of your actual divorce discussion. But the best way to extract the cash is to sell the home. You can then split the proceeds as called for by the divorce decree and get on with your lives.

When you leverage your home's value through a home equity line, a home equity loan or a cash-out first mortgage, you'll also have to repay the loan. Who is entitled to the equity that you're plowing back into the property?

If I were divorcing my wife (which I'm not), I probably wouldn't want a new mortgage on a home I'm set to leave. But, let's say you take out a 15-year mortgage for $150,000 and that your ex-wife stays in the home over the following life of the mortgage. You've taken the cash out at closing, but assuming a 3.75 percent amortized mortgage, you would have paid more than $46,000 in interest expense and $196,000 in payments.

There's also a question if you can afford a new home. You would have much of your monthly income tied up in the mortgage payments on your former home. You could also pay some cash with the $150,000 you get at closing.

I think both of you must still decide how to split assets in the divorce. Then, one question will be how to attain your future financial goals, possibly including whether you want a new mortgage.

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