Equity in home used to satisfy marital settlement terms

Mortgage broker:

ProMortgage.

Property type:

Appraised value: Loan amount: Loan type: Rate: APR: Backstory:

Liz Bayer,

Three-bedroom in the Presidio neighborhood.

$2.25 million.

$1.8 million. 30-year fixed.

5.5%.

5.52%.

A financial planner referred her client to me who was recently divorced from her husband. While going through a divorce, it is often stressful for all parties. In this case, the couple had an amicable arrangement in the finalized marital settlement agreement.

The good news for my client was that she would be keeping the home. The only requirement was that she needed to pay her ex-spouse $450,000 as part of their settlement.

My client did not want to pay her ex-spouse from her hard-earned savings.

The solution was to refinance the home to utilize the equity to cover the cash needed and, fortunately, there was plenty of equity in the home to cover this.

What she didn’t realize, however, was that this sort of transaction is not considered a “cash-out” refinance — which is the case when a spouse is using the funds to pay off another spouse or ex-spouse as part of a marital settlement agreement.

Our rate was 5.5% on a 30-year fixed (APR 5.519%) which was priced as a “rate & term” refinance. The term “rate & term” refers to refinances that are priced as if there is no cash out.

If, however, the same transaction had not involved this arrangement and the borrower was simply taking cash out, then it would have been a bonified “cash-out” refinance and, in this case, with this 80% Loan-to-Value, the rate would have been 6.750% (APR 6.758%).

With the “rate & term” the monthly “principal plus interest” payment is at $10,220 per month, compared to the “cash out” “principal plus interest” payment with the higher “cash out” rate of $11,674 per month, which is over $17,000 better in payments over a year’s period.

Now my client is the sole owner of her home she did not have to deplete her bank savings.

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