Best way to pay off an Ex and a Home Equity Loan (2 different debts)?

[Dahlia]

Hello all,
I'm torn about how to handle an upcoming situation.

Background: I own a rental property free and clear. My ex husband has been renting it from me for the cost of the expenses only, but just told me he is moving out.

Ex is moving out so that I can sell the house and pay down a $212k home equity loan on my house that he and I are jointly responsible.

Rental house will clear around $180k after 6% realtor fees.

Ex wants to buy a house of his own but needs his name off all debt to qualify for a mortgage. So he wants me to sell this rental house and bring the home equity loan down to around $32k.

Then he wants me to refinance the home equity loan to take his name off it.

I'm guessing the refinance is going to cost me around $2k to get his name off- and that money would be much better spent just paying down the loan.

There is a way I can avoid having to refinance by paying off the $32k in cash within a few months, but I don't know if it is long term a smart move:

In the divorce agreement- I owe husband $25k from my 401k. I've been reluctant to take the money out of the 401k (because I spent a long time working for that money!), so I've been saving up $1500/month to pay him in a lump sum and leave my 401k intact. I expect to have the full amount by Jan 2018, and he is expecting to get the money at that time.

Would it be better for me to use the $25k I've been saving and pay down the remaining loan further, bringing the remaining balance to $7k or so on the home equity line? I think Ex will be agreeable to leaving his name on a $7k balance and I'll keep paying it down aggressively every month.

And to pay off the husband, I actually DO give him $25k of my 401k? My 401k has a total balance of $48k- so this would cut my 401k in half.

It seems like an easy way to just pay off everyone and move on. Seems like a good move.

But I vaguely understand that compound interest is extremely important and if I left that $25k in the stock market, it will be worth something like $250,000 one day.
I'm basically forfeiting the compound interest that the $25k could bring in- to avoid paying $2k in fees to refinance a $32k loan. So when you look at it that way....seems like a bad move.


I'm 38 yrs old.

So....what should I do?

[Gailete]

Sorry to hear about all this.

If he is jointly responsible for the house, there is something goofy here. Unless I misunderstood you, if you are jointly responsible for the mortgage, who has been paying the mortgage each month? Both of you? If it is you and you alone and depending on for how long, his share of the equity, it seems to me, would be the value of the house less what was owed at the time he quit paying on the house divided by 2, so the equity shouldn't be an even split of what the house is worth now if you are the only one that has been paying on it. Your mutual lawyers should have had this all sorted out at the time of the divorce. It sounds like someone fell down on the job there.

I suspect that you don't want to hear this, but it seems to me you need a lawyer to get this figured out. Why should you have to sell something that is yours and yours alone? Seems like HE wants you to do a lot. How about this. Sell the jointly held house and divide the proceeds by the amount it was worth at the time of the divorce and if he hasn't been paying anything on it since then he gets less of the equity split. Then you get your share of the equity, you get rid of the ex, and you still have your own property. May not be the best thing, but it seems silly that he is forcing you into all of this that actually should have been settled via the court not by him.

[Petunia 100]

And to pay off the husband, I actually DO give him $25k of my 401k? My 401k has a total balance of $48k- so this would cut my 401k in half.

Is there already a QDRO? If not, you will have to go back to court to get one. I paid 1k for mine.

QDRO or not, I think you are better off to pay him 25k from outside money.

Is his name on the house? I guess "yes", since his name is on the equity loan. I would want to refi to get his name off of my house and mortgage, irrespective of the cost. (I mean, of course you will shop for the best refi deal possible.)

Don't leave your affairs messy, still having joint assets and liabilities with your ex. Get it all cleaned up so you can move forward without entanglements.

[disneysteve]

Don't leave your affairs messy, still having joint assets and liabilities with your ex. Get it all cleaned up so you can move forward without entanglements.

Agreed. I see so many stories of people who are divorced but still own things jointly with their ex. I don't understand why people do that, or why their lawyers allow it. I would never sign a divorce agreement that didn't totally separate me from the person I was divorcing.

[Gailete]

I know with my divorce it came with a QDRO leaving the house - that he wanted - in both our names. I had a horrible lawyer and he had a shark. But he finally had to refinance the house to get my name off of it and the rental property we held jointly.

Banks apparently can care not at all about QDROs as they still don't absolve the co-signer from any responsibility on the loan. They are still just as responsible. At least that was the law here in PA. Refinancing is the only way to get the other party off.

[siggy_freud]

Did you factor capital gains into the equation of selling the rental? Just wanted to ensure you were factoring that in if it applies to you.

[Dahlia]

ok, I see what you guys are saying. But actually, in the divorce I took responsibility for more debt than I really needed to, because ex husband is on disability, I wanted the divorce- not him, I wanted this over as fast as possible, and I wanted minimal lawyers, courts, so I agreed to terms very quickly to avoid court battles.

I've decided to sell the rental property- it will be listed after the Holiday. As for the other debts- I'm going to wait and see where I end up with the rental property selling before I decide how to handle the remaining payoffs.

Capital gains on this rental- unfortunately will be high. I didn't take that into consideration with the divorce agreements.

I will be making almost $30k on the sale of this property.

My total annual income is about $65k- so proceeds of this sale will bump my annual income way up. But come tax time- I'll figure it out.

Within two years this will all be behind me and I expect to be fully recovered from this.

[Like2Plan]

Dalia,
Is your 401k pretax or Roth? It would be less favorable to you if you pay him using after tax money to settle if your 401k is pretax money...
It might be better to split the 401K ASAP so you don't have to worry about changes in the market. You could increase future contributions (assuming you're not maxing it at this point) to get your balance back up.

[Dahlia]

It is a 401k- so before tax money.
You suggest I use the before tax money? Can you better explain why?

And...will I have to pay penalties or charges to move the 401k money to his?

He wants the cash to build a house. I know that. I have no problem making him pay fees to pull the money out of his 401k...but I don't want to incur costs myself. I also don't really want him to incur costs if all options are equal. I'm not a fan of his- but don't see the point in some company getting my hard earned money when it could go to him and help decrease the friction between us.

[Like2Plan]

If the 401k is split due to a divorce with a QDRO there are special rules in place.

Here is a link that touches on this:

http://financialducksinarow.com/525/401k-qualified-domestic-relations-orders-qdro/

If you give him 25k after tax money-- he will get 25k and you pay taxes on that.

If you give him 25k pretax-- it will be 25k minus the taxes he pays on it.

[Dahlia]

ok I get it, I read the article.
I'm still undecided - It's going to come down to the sales price of the rental property.

Follow up question- do I contact my 401k provider (Fidelity) to get a QUADRO?

[Gailete]

I think the QDRO is decided and done at the time of the divorce. You are actually treading water that it might make sense to hire an attorney that is an expert in finances. You mess this up, you could be losing money big time.

[Like2Plan]

Just to piggy back off of what Gailete said--I believe your retirement account is something that you specifically want to have addressed in the divorce settlement. Otherwise, what is to prevent your EX spouse from going after it years later when you have even more in the account? (Even though you are giving him cash)

[Gailete]

Dahlia, Here are some urls to more info about the QDRO that you should read. One is the IRS take on the matter. I don't have time to read all of them, but I know the reasons I get a check for ~$95/month is because I had one concerning my ex's pension! You should probably read up on them before you make a fatal financial mistake. Hope they help.

http://www.pensionrights.org/publications/fact-sheet/i%E2%80%99m-getting-divorced-what-qualified-domestic-relations-order-and-why-should-

https://en.wikipedia.org/wiki/Qualified_domestic_relations_order

http://info.legalzoom.com/after-divorce-ruling-qdro-24399.html

https://www.forbes.com/forbes/welcome/?toURL=https://www.forbes.com/sites/jefflanders/2012/06/13/how-divorcing-women-should-handle-retirement-accounts-and-pension-plans/&refURL=https://www.google.com/&referrer=https://www.google.com/

https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-qdro-qualified-domestic-relations-order

[LivingAlmostLarge]

Sell and refinance and pay him $25k from the sale of the home. I would stop trying to be so cheap about $2k refinance and just cut ties financially. You know many people would kill for such an easy divorce. $2k to clean up the mess seems like a minimal amount to pay. And instead of cashing out the $25k from 401k then pay from the sale of rental because you owe it and stop counting pennies and losing sight of the main thing clean up the mess and move forward.