Family Residence - Equity Buyout vs. Cash-Out Refinance

Family Residence - Equity Buyout vs. Cash-Out RefinanceWhen the sale or buyout of the family residence is at issue in a divorce, it is smart to understand the different ways to characterize the loan necessary to effect that transaction when preparing a Marital Settlement Agreement.  Here is some helpful information on the difference between a ‘cash-out’ refinance and an equity buyout, provided by Miguel Saenz, Certified Divorce Real Estate Specialist, from the Divorce Real Estate and Lending Association: 

 "In order for any cash equity taken from the marital home to be considered as an equity buyout due to divorce, the amount of home equity included in the marital lien needs to be specifically addressed within the “Homestead” or “Family Residence” section of the Marital Settlement Agreement. Failure to address the equity buyout within the that section disqualifies the equity withdrawal as an equity buyout and the refinance will be treated as a cash out refinance in the eyes of Fannie Mae and Freddie Mac." 

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Here is an example-
 
Cash Out vs. Equity Buyout in a Divorce Situation
 
Below we have a property with a fair market value of $500,000 with $200,000 in equity. The mortgage will be refinanced with a new loan amount of $400,000 of which $100,000 will go to the departing spouse. In the examples below, one can see the savings the client can save IF the loan is structured as an equity buyout and not a cash out refinance. The lender will treat this as a cash out refinance which demands a higher interest rate than an equity buy out.
 
  
•       $500,000 Property Value
•       $300,000 current mortgage
•       $100,000 equity buy out
•       $400,000 new ‘cash out’ mortgage @ 4.5%
•       New P&I Payment: $2,027
 
  
•       $500,000 Property Value
•       $300,000 current mortgage
•       $100,000 equity buy out
•       $400,000 new ‘equity buyout’ mortgage @ 4.125%
•       New P&I Payment: $1,939
 
$31,680 Savings over the life of the loan
 
As you can see, structuring the loan as an equity buyout can result in the saving of thousands of dollars.  Consult with an attorney or a Certified Divorce Real Estate Specialist for advice.

For more information on this topic, contact Miguel Saenz at Symbol Real Estate