Help empower me to move on

[Cathie]

I am a 53 year old, about to be divorced woman, working full time with a yearly salary of $40,000, needing to refinance the $110,000 balance left on my 10 year old home (now valued at $550,000). After a 25 year marriage, I will receive no alimony or other income and my current employment situation will end in a year, so I will need to switch jobs or careers, but do not foresee any major change in my income level. I am currently seeking a part-time job to supplement my current salary, but the economy is making it difficult to find something that fits into my schedule.

I have $60,000 in savings and $50,000 in an employer ESOP plan. Because of the current housing market, I plan to stay put for the next few years until the value returns back to the $650,000 range it was at 3 years ago and then use the profit for my retirement. I plan to work another 12 years and do whatever I can to downsize and save so I can sustain my living expenses in the future.

My property taxes are $4,000/year and home insurance is $1,000/year. I have excellent credit and no other debt and have been overly frugal knowing the impact this divorce would place on my lifestyle. When I start paying this mortgage, I will not have much extra each month to place into savings, unless I continue to follow a tight budget that eliminates discretionary items like travel, entertainment, dining out, home improvements, etc.

What’s my best financial move? Go for a 30 yr. conventional mortgage at 5.5% (hopefully) with a monthly payment of $700 or deplete some savings to place towards the reduction of the mortgage balance? I am only beginning to educate myself about financial health and appreciate suggestions from any of you who might be in the same situation.

Thanks much!

[LuxLiving]

Hi Cathie & WELCOME to SA.com! You've landed in a great place for help, so add it to your Favorites and keep coming back here.

So sorry to hear that your marriage is dissolving! I don't have any specific advice that I can think of at the moment but if it twere me I'd probably try to refinance at 30 years and then try to pay off ASAP. The 30 year smaller payment ought to give you more breathing room in the day to day budget. No way to just keep the existing mortgage by having your soon-to-be-ex doing a quit-claim??

I also might try to find a financial advisor.

You might want to check out the SAblogs too - there was someone??? can't remember who right now, maybe it was CarolinaBound, who posted in one of the contest about what she wished she knew before her divorce? If memory serves, Broken Arrow is one of the bloggers as well, who posted about his divorce thoughts.

On moving on? I just found this in the SA forum archives (which I heartily recommend):

Squirell and the acorns

Step by step you'll get there! Like eating the proverbial elephant, one bite at a time! And, congratulations, it sounds like you are already pretty financially savvy and w/o CC debt you'll likely make the transition easier than those who are up to their eyeballs in debt.

[Hot dog]

I think I would pay down the mortgage just for peace of mind. You will have much more room in your budget for emergencys (although make sure you keep an emergency fund) and for saving if your mortgage is small. Welcome to the forum and we are here for you to give you support through all this

[jIM_Ohio]

I see problems as 3 fold:

1) you have a budgeting and cash flow issue which needs immediate attention
2) you have a short term need for lots of cash on hand (job loss)
3) you have a long term need to make sure you have assets to live off of in retirement.

You did not state where you live. My ideas are this:

Sell house and pocket ~400k. This removes your largest liability. Buy something modest for 200k and invest the rest for retirement. This removes the mortgage payment from the budget and should smooth over impending unemployment.

Opposite idea is is to refinace at 30 year fixed. The $700 payment will be around $90 towards principal and $610 towards interest. You will probably not pay off the house until you either move or die. This delays a problem at a relatively high current expense.

You did not list the current mortgage payment. I might consider a 15 year fixed before I refinanced a loan with only 10 years left. or look for a 10/1 ARM and see if that gives better results.

I would focus on problems 2 and 3 more than 1. Get cash on hand to whether the unemployment. Work a second job, get a roomate or something similar. A 600k house for one person is quite large- do you really need that much space?

I would also look for retirement needs. If you make 40k now and have 40k in expenses, you will need $1 M to retire. If you invest around 200k of the house, it will could be 800k in 12-16 years which could allow you to retire without any loss of spending.

If same 200k is kept in the house equity, you are looking at a 500k house appreciating at around 3%- in 24 years that house would sell for $1 M. In this situation you would need to live in house, work, and pay taxes for 24 years to retire with same standard of living you have now.

I assume the divorce is tough on you emotionally. I feel for the issues this causes. My advice is decide now what you want out of life. Now and in next 12 years and when you retire around age 65. Then look at what it takes to make that happen.

Don't let the short term cash flow issues be the problem you solve, use this as an opportunity to get out of life what it is that matters most to you.

[Scanner]

Sell house and pocket ~400k. This removes your largest liability. Buy something modest for 200k and invest the rest for retirement. This removes the mortgage payment from the budget and should smooth over impending unemployment.

Yes. . .I don't know where you live. . .but if you have no children. . .I agree with jIMOHIO to liquidate the house.

Unless you live in an area where $550,000 doesn't get you much. Where do you live?

I'd avoid refinancing if at all possible. The truth is I think it may be more than 3 years to get a 20% return (you are asking your house to appeciate 20% in 3 years to reach $650,000).

I think housing will be flat, very flat, for a long time. . .if you liquidate your house to something more modest. . .you can at least be earning a positive rate of return in stocks + bonds.

[disneysteve]

Welcome Cathie. I think you'll find lots of support and good financial advice here.

I have to say one thing screamed out at me as I read your post:

Originally Posted by Cathie

yearly salary of $40,000

home (now valued at $550,000

I realize your home was bought when you were in a dual-income relationship, but now that your situation has changed (or is about to), I have to agree on reevaluating keeping that home. I think one of the biggest mistakes that women make (not to be sexist but it is primarily women who find themselves in this situation) is to try and keep the house after a divorce. Just taxes and insurance alone will eat up 12.5% of your gross income (and an even larger percentage of your take-home pay).

You are sitting on a home profit equal to 10 times your annual income. That's a huge amount of money. Sell the home and move into something much more modest. Pay cash and invest the rest. That will greatly improve your situation, your cash flow and your retirement prospects.

[tripods68]

Originally Posted by Cathie

What’s my best financial move? Go for a 30 yr. conventional mortgage at 5.5% (hopefully) with a monthly payment of $700 or deplete some savings to place towards the reduction of the mortgage balance? I am only beginning to educate myself about financial health and appreciate suggestions from any of you who might be in the same situation!

Welcome Cathie!

This is what I would do. Refi @15 years mortgage. I say that because you are already living a frugal life and still plan to work for another 10 years. It might reduced your mortgage payment somewhat but I would still try to pay it off sooner. You have no other debt, except mortgage, and property tax, which is excellent. You should start saving more towards retirement. Also start thinking about working a second job to supplement your income. Finally, find something you will find enjoyable to keep your mind occupied.

Good luck!

[LivingAlmostLarge]

Dump the house. You need cash on hand and buy something else with the cash from the purchase. It will stretch the dollars you have further.

[Cathie]

Of course, I left out the fact that I live in California, North of Sacramento – one of the hardest hit counties in the real estate plunge where everyone is holding on to their homes, if at all possible.

We paid $199,000 for this brand new home 10 years ago. The current mortgage is a 15 yr. term at 5% with a monthly payment of $1100.

So, to still live here and now pay $700/month seems like a bargain to me. Anything else comparable, whether a condo rental or smaller home mortgage will cost me $1500/month minimum and will not have the amenities I now have. I know I won’t have the maintenance either, but I love doing yard work for the exercise and I also do my own pool maintenance, as well, so I’m not pouring out money for lawn or pool care that most people do.

My children are still in college, one 2 hours away, the other 5 hours away, so for two more years, at least, I’d like to get to see them over holidays and vacations and the only way that is possible is if they come back to visit me in a place where there is enough room for that to happen. I know everyone says I should not make decisions based on the kids, but I’m leaning towards this path not really for them, as much as for me. My whole life has been turned upside down and at least having them around occasionally is providing some presence of family structure for me. I have no other relatives in this state and only a small circle of friends.

While I understand and appreciate all of your comments about selling the house, what puzzles me is this:

If I sell now, I can only hope to get $500,000, at best, in the current market, so after paying off the mortgage balance of $110,000 and closing/realtor costs, I net about $345,000. It is very difficult to find a $200,000 home where I live, but if I do, and I pay cash, I net $140,000 to invest, correct? I know this would mean I’d have no rent or mortgage, but with the pending change in my employment, I might need to relocate again in a year and that makes me wonder how practical a step this would be at this time. It seems better to get the new job and then make the housing decision after that task is accomplished and also when the housing market has begun to come back.

In my thinking, I would stay in the house until the market rebounds, however long that is, 5 to 7 years. If I can sell it for $650,000 at that time, I will net $540,000 less closing/realtor costs and walk with $480,000.

At that time, I will probably decide to just rent in an over 55 community or I may even relocate back East to my hometown or closer to the kids, wherever they end up. There are so many unknowns for me at this time; it is really hard to make a decision about what I want for my future, let alone on a day to day basis. I do know that moving is expensive and I don’t want to do it more than I need to.

I also realize that I need to take my emotions out of this decision, but that is so difficult when I’ve lost most of my identity and the roles that defined me, during the course of this divorce. The house is all that I have left that holds some part of who I was and who I am now. Again, I realize I can’t use it as a crutch and need to de-sensitize my connection to it, but that is a difficult thing to do.

Because I know little about investing and have only common sense to guide me, I really appreciate any additional thoughts you can offer to help me understand the most economical solution. You’ve already expanded my thinking in what you’ve posted so far and I am most thankful I decided to log on to this site.

[zetta]

One consideration -- if you paid $200k and can now get $500k for the house, that is a $300k profit. How soon will your divorce be finalized? If you sell the house before your divorce, you won't have to pay taxes on the profit ($500,000 exclusion for married couples.) If you sell after the divorce, your exclusion will only be $250,000, and so you will have to pay significant taxes on the $50k profit -- maybe $12k? If you wait for the market to rebound, your gains will again be reduced by the taxes -- unless you remarry.

If you have to relocate when your job ends, will you be forced to sell the house?

If you do decide to stay in the house, I'd give serious consideration to renting out a room or two.

[Joan.of.the.Arch]

Have you already worked out with your soon to be ex-husband that you will keep the house? Will you have to pay him half its value, half your equity, or some other? I don't know how you work out with the mortgage holder how one person gets let off the mortgage. All these are reasons for why it is sometimes just simplest to sell the house in divorce.

[tripods68]

I live not to far away from you Cathie. I'm in Elk Grove. My coworker lives in Natomas and also in the divorce stage like you are.

You are definitely in the right path. My advice is keep your house for now don't move if staying put is what you want. Even if you move out the area, you have the option of renting your house or sell it at that time. At least you can rent this house for more than $700 a month and still make money or cover your expenses.

[Cathie]

Hi,

Some more background on my situation....

Our Marital Settlement Agreement (done through limited mediation because I wanted to save myself and him from ridiculous legal fees) calls for me to obtain a new mortgage on the home, in my name only - picking up the current balance left on the existing mortgage. The deed has already been transferred into my name only (11/07).

Short list of the terms calls for the Home Equity Line of Credit to be paid off by 7/30/08.

(Background: I did not discover, until we separated, that the credit line was used to finance his business and that it was tapped out. He hid this from me for 3 years.)

His payoff of the LOC triggers my filing the MSA with the court so the divorce can take place. Since there were no retirement funds or other assets to split, I chose to take the house with balance of mortgage at time of re-fi, in lieu of spousal support, that would have been paid to be over the next 10-12 years.

My husband's salary is four times what I was bringing into the household, so his support payment would have been substantial had I gone that route (or equal to half of the $600,00 house value- back when that "was" the value of the home).

I worked part time to raise the kids for 21 of our 25 year marriage and my salary went towards groceries, clothing and home expenses, not much else. When he walked out the door, I had $300 in my personal savings. We were also paying for 2 kids to go to college.

Since he left (3 1/2 years ago), he has paid the mortgage, insurance and property taxes on the house while I banked as much as I could after paying utilities, upkeep and personal expenses. So I have banked $40,000 in savings since 2006 when it became clear to me that I couldn't save the marriage by myself.

(Essentially this would have been equal to temporary support had I filed for it. My youngest child was under 18 years old for 9 months after he left, but because he led me to believe we would reconcile I did not file for child support, so he played me pretty good.)

Terms of our agreement (which we both signed off/notarized last November) called for him to continue to pay all of the above until he paid off the LOC. He was initially to have completed this last December so we could be divorced in 2007. He has, no suprise here, postponed his self-appointed deadlines over and over again, stating lack of funds.

The mediator purposely set up the agreement this way so he would be paying down the mortgage balance until I could re-fi, to give him incentive to get his part done.

By the way, I can't even begin to go for a new mortgage until the LOC is paid, as it is essentially a lien on the house. And, he was the petitioner of the divorce (11/06), so there is much irony in this situation. He wanted the divorce, yet, he is the person dragging it on this long, but seems to be the only person on the planet who can't see how foolish it is for him continue to think these are terms that make sense.

At this point, I could take the MSA and file it with the court and get the divorce finalized so that I could take him to court for violating the terms of our contract. He would then be (actually he is now) in contempt of court and I could file paperwork to go after the LOC payment. I have been reluctant to do this yet because I know it would only create more negativity in an already crazy riduculous situation and if he really doesn't have the funds, then I'm still in the same place. I am also the party benefiting by just accepting it and being patient, as the longer this continues, the lower the mortgage balance for me to assume. (Mantra - this too shall pass)

Well, I tried to give you the short version, but it doesn't look too short now, does it? I could write a novel with all of the other sorted details, but wanted to try and convey to all of you some of the emotional abuse I've tried to overcome through these past months, now years.

My only hope is that my story will help someone else from being betrayed by a person they trust. The lesson I learned from all of this is not to take life for granted and to always trust my gut before anything or anyone else.

Thanks again for your input and I welcome more comments - your objectiveness is grounding, encouraging and offers perspectives that I have not considered by being so closely wrapped up in this situation.

[disneysteve]

I realize there are a ton of emotional issues here, but your original question was:

What’s my best financial move?

The reason folks post here is to get unbiased, unemotional answers to their financial questions.

I've got to stick with my original opinion that a person earning $40,000/yr. can't really afford to keep a house worth at least $500,000. Even if you lower the mortgage payment to $700/mo., with taxes and insurance, you're paying 33.5% of gross income for housing. That's pretty high. Rule of thumb is not to exceed 28% (and I think that refers to take-home, not gross).

You say you may have to relocate in a year. Fine. Don't buy a new place. Sell this place and rent for a year. The kids can still come and visit. And you can have $350,000-$400,000 in an MMA earning interest.

Once you have a new job and know where you need to be, then you can go shopping for something more permanent and affordable on your income.

[maat55]

While he's paying the house payment, I would continue to save money. When you can sell the house, I would and buy a house 200k or less, leaving you about 300k. Take 15k for an EF, then invest the rest in Growth stock Mutual Funds with a 10 year track record of 10% or more. You should be able to have around 1 million by age 65 with a payed for home. Good luck.

[jIM_Ohio]

I feel for you. I don't know you and your story makes me realize how much I value the friendship and trust I have with my wife. I could not imagine that falling apart, and if it did, I know I would be a wreck.

Sell the house- gets you cash on hand and it appears you would NOT get taxed on the gains (because the divorce is not final). Then use the cash to invest and secure YOUR future. If you do not secure your future, you will probably regret many of histories decisions, and that is no way to live in retirement. MOVE ON. Move on from the house, move on from the divorce and know that if your kids really do understand and care, it's not the house that makes it a home, it's the people in it which make it a home.

Interesting sidenote. My wife and I moved in Dec of 2005. We looked at each other one day over xmas and commented that it did not take long for us to make this a home- it was like we never lived anywhere else. My point is that you can restart yourself somewhere within 6-9 months and you will barely remember the old days in a larger house.

If you can rent the rooms out, that is an option, but being a land lady is not for everyone.

If you stretch to keep the house now and for around 1-3 years, you solved a short term problem and complicated longer term solutions. You have a sizable gain in the house- what if it's value drops further?

[snafu]

Have you seen Maria Schriver/ Schwarzenegger's new book on self discovery? Add your name to the waiting list at the local library.

Since your employment is going to change & he continues to make mortgage payments [call ea. month to make sure he is not in arrears] it would be helpful to have the house equity help you rather than be an albatross. I suggest you give up a level of privacy in exchange for a combination of $$ and company by renting rooms to college students/visitng profs if there is a community college/university in the area.

Alternately, 'house-share' with professionals in your area. This doesn't preclude your kids from being home in the summer, 'think outside the box' and switch room useage.

2nd sign up for a course in financial planning at your local community college. Getting unbiased information on options in uncertain times will be helpful. There are serious, long term, economic contractions to face down. Keep in mind as your house value decreases, those decreases are also in the area you re-locate.

[LuxLiving]

Remember if you do sell the house you can always rent a hotel suite for the couple of times a year your kids are home. Heck, make Marriott the holiday headquarters for the next couple of years. I agree with the guys here, you'd quickly make any new place home. Maybe look at buying a small 2 bedroom ground-level condo in your new locale. Poof!! and Viola!! - Home maintenance taken care of into your old age w/room for visitors.

Your kids are young and most likely more resilient than you realize. They can be comfy on a couch or even the floor in a sleeping bag if Momma's happy they will be too! Think of it as an adventure and make it one for them as well. I understand, where you live now is home and all, but they'll bounce back.

Most likely if you keep your chin up they'll think...
"Hey, Mom's moving on, so what if Dad was a jerk, she's one heck of a gal, look at her starting out fresh and loving it! That's the kind of grown-up I want to be."

A few weekends on a lumpy sofa aren't going to kill them while you transition to your new future!

FYI - Since you're a newbie here - If I were in your position, I'd listen carefully to what disneysteve & Jim_OH are telling you. They're pretty money savvy and I would take a long hard look at what they are advising and see if it wouldn't be long-term best for my interest and well-being.

What would happen if you put the house on the market at a decent price for today's conditions, while your soon to be ex continues to make payments w/a goal to refi after two months or three months? If it sells okay. If not, you can still be pursuing the refinancing angle.

[disneysteve]

Originally Posted by LuxLiving

What would happen if you put the house on the market at a decent price for today's conditions, while your soon to be ex continues to make payments w/a goal to refi after two months or three months? If it sells okay. If not, you can still be pursuing the refinancing angle.

I just thought of something. Are you legally free to sell the house currently? You did say it was in your name, so I'm assuming you are, unless there are terms of your agreement that say otherwise.

Just to give you some additional numbers, let's say you walk away with $350,000. You can currently get about 4% on that money, but let's be conservative and say 3.75%. In a year, that will earn you over $12,000 in interest. You can use that interest to pay your rent, so the first $1,000 each month would be taken care of. You'd only have to come up with the difference plus all of your maintenance would be taken care of and your utility bills would be a lot smaller.

Moving is emotional and a pain in the butt. I dread the day we have to leave our home. But as others have said, sometimes you need that short-term sacrifice for the long-term good.

BTW, thanks for the compliment, Lux.

ETA: My mom's situation is different than yours but worth mentioning. She is widowed. Their home was paid for. Still, between taxes, insurance, utilities and maintenance, she was spending a fair amount to live there. She sold the place a year ago and moved into an apartment in a very nice senior complex. She invested the proceeds from the sale and that now generates more in interest per month than she pays in rent, so she's basically living free. Trust me. It is not a bad situation to be in.