Wednesday, December 10, 2008
5 Creative Tips for Using Home Equity During Economic Uncertainty
In many marriages, one of the biggest assets is the equity in the house. Even thought we are in the midst of tremendous financial uncertainty, there are still several options that can be considered when dealing with home mortgages when it comes time to divide marital property in a divorce.
1. Sell the house and split the equity. The house can be sold and then the equity can be divided between the parties. Of course, in various parts of the country, house values have drastically plunged, which reduces the net equity upon sale, if the house can even be sold. Fortunately for us locally, the Fort Worth and Tarrant County housing markets have felt minimal effects from the housing downturn. For the immediate future, it looks like it will be possible to sell a house and still come out in pretty good shape, at least as compared to other parts of the country. Of course, a relatively new house for sale in an area with continued (or recent) new building will be hard to sell, so the local market isn't good all across the board. Still, Tarrant County house sales are reported to be pretty strong.
2. Consider the equity as just another asset. If one party wants to keep the house, it may be possible to keep the house and just offset the equity with other assets. In other words, the other party can keep other assets that total the same in net value as the house equity, so both parties are happy. It is pretty easy to get a house appraised and to find out the current mortgage balance on the house. The difference, which is hopefully positive, is the equity. Be sure to consult with your attorney or CPA about the tax implications of various assets when you are thinking about how to divide them up.
3. Refinance with cash out. There can still be refinancing, although the rules are tighter and there is less cash available. If you want to refinance, check with your attorney for a reference for a mortgage broker who may be able to help you. With the tighter credit market, a higher credit score will probably be required, but brokers are still anxious to work deals within their guidelines.
4. Cash out through an owelty loan. A specialized form for refinancing is to get an owelty payment from the house equity. This is a form of refinancing utilized in Texas that provides flexibility and a fairly easy way to withdraw cash from house equity. Again, your attorney may be able to recommend a mortgage broker who can help you.
5. Reverse mortgage. It may also be possible to get a reverse mortgage if you are at least 62 years old and there's sufficient equity in the house. Cash is paid out to you and you don't have to repay it as long as you live in the house. Various lenders provide this service which is relatively new in Texas. Make sure you understand how it works before you sign up for it. It can provide cash even when you are retired or have low wages.
If you are in the situation where your house is the major asset, you can consider using one of the above approaches for getting cash or the value of cash for your interest in the house. Talk with your attorney about who to contact. It helps to have a budget and to plan for your future wants and needs. Do you want the house? Can you afford to pay for it? Can you afford the extra cost if more money is borrowed against it? Would cash be better for you? What are the tax consequences? These are all issues you need to carefully consider with your attorney and possibly a financial advisor, such as a CPA.