Mortgages after divorce/separation
June 2, 2010 12:11 PM   Subscribe

What should I do with my mortgage amortization following separation from my husband?

I recently left an abusive marriage. We have small kids and I will continue to work just part-time for the next two years. My ex is paying child support and some spousal and I've negtiated 80% of the equity in the home. This now means I'm paying 80% of the mortgage, which is a huge chunk of change. We are in Canada and locked in at 5.89%. I could refinance at a 1.75% variable. I don't need those numbers run - I can work them out. It's more about amortization and cash flow.

Because of all the huge balloon payments we've made and the much lower rates now available, I would see a huge change to my cash flow if I switched to a monthly 15-year amortization, vs the weekly amortization I have now. It would drop another $500 a month for me if I switched to a 30-year amortization.

I have 2 years left on the mortgage and there would be a $10k penalty if we broke it to refinance. I know I can get that down a bit via some prepayments.

I'm just wondering whether it makes sense to refinance and what sort of amortization makes sense.

Right now, with weekly payments, my share of the mortgage and strata is HIGHER than even the child support + spousal I get. (Although I do have 80% of the home value, of course.) I live in a very, very expensive city and this is just for a condo, so downsizing isn't really an option. Besides, regardless of amortization options, it will actually be cheaper for me to keep living here than to go rent the same thing.

Also, I don't currently have the option to rent out this property under the terms of my existing mortgage.

Does it make sense to pay to break the mortgage (which would eat up some emergency savings) so that I can have more cash flow? If so, should I go for 15 or 30 years? Should I go for a longer amortization till my kids are a bit older and I can be earning more? On the other hand, with the shorter amortization, I will be in a better position to buy him out of the mortgage in 5 years and I'll have more equity. The equity I'd get monthly works out to almost double the extra cost of the 15 year amortization. (Eg, 15 years costs $400 a month more, but results in $720 equity.)

I'm talking to my broker and looking at all my options. But I'd appreciate insights that look at all this in the context of a separation. While it would be great to buy out my ex, I don't want to do that right now as I don't have a huge income and might have trouble qualifying on my own as I'm self employed. (I do have a good income potential, but my kids are small right now.) FWIW, my ex has never been financially abusive and so far has been making all his payments and I hope that will continue.

Sorry if this is a bit muddy. Just to be clear, I don't need help understanding what my payments will be - it's more about whether I should free up as much cash flow as possible or go for 15 years, which results in more equity and not such a disgusting amortization length!
posted by anonymous to Work & Money (3 answers total)
I am a little confused by your post but I will answer from what I understand. Although he is paying now almost all separated/divorced couples I know have a period of time when the payor tries to use the CS and SS as leverage by witholding payment. If that went on for several months you would be screwed. I would opt for the longer amortisation and smaller monthly payments even if it eats into your emergency savings in order to give yourself a better cash flow. When your life is stabilised in a few years you can renegotiatiate a shorter amortisation. I hope you have used a lawyer and have shared pension equity too. Many couples opt to use their pension entitlement to reduce the equity-payout. A good book is Surviving your Divorce.

Good luck!
posted by saucysault at 12:25 PM on June 2, 2010

This seems hard to answer without knowing your actual budget situation, and has something to do with your personality as well. Some people are more 'pay it down early and just get it done' type of people and some people prefer to pay less up front.

You will obviously get the best return on your money if you pay it down faster with higher payments, so the logical answer would be to say go with the shorter amortization, get more equity, and pay less in interest. This could potentially make the loss of money up front for breaking your current terms worthwhile. But I don't know how desperate you are for money.

Also it would be good to consider how long you plan to stay in the house. If you are planning to move within the next few years, I don't think it is worth losing $10K to change your mortgage terms. Assuming you are going to stay there a long time, I would be more willing to aggressively pay down the mortgage in the interest of having a house that's fully paid off. To me it sounds like saucysault has some more advice from the standpoint of being divorced, but I would also point out that it looks like you'd lose $20K by doing that (assuming you change the mortgage terms twice and each time it costs $10K). To me that seems unlikely to be worth it (then again my mortgage is $950 so $10K is a significant number of payments' worth) but also consider - is this really a good time in your life to deplete your emergency fund? What if you need it for a real emergency?

So to me I would save the emergency savings for if your husband tried to withhold payment for a few months, and stick with your current mortgage payments.
posted by treehorn+bunny at 1:48 PM on June 2, 2010

Mod note: From the OP:
Thanks for your replies.

I thought about this some more. My broker agreed about doing some prepayments with a line of credit for a few days to reduce the interest penalty, then refinancing and using the mortgage to pay back the prepayments and set up a new mortgage. Because my current mortgage is weekly and based on the original balance, the payments I’m making don’t reflect the balloon payments I’ve made. So I could switch to a monthly 30-year amortization and cut my payments in half or even a 15-year would cut the payments by a few hundred. Using the prepayments, I can reduce the penalty to $6k. The broker said to add the $6k to the mortgage, which would basically only cost me a few dollars a month and not eat up my emergency fund. That way, if my ex withholds any payments or I run into financial trouble, I’m not faced with coming up with $2500 a month for mortgage and strata fees and property taxes and so on. He said that, because I’ve always been a disciplined investor who makes balloon payments, he’s confident that this won’t mean a 30-year amortization in the long run. He said that I could always put the difference between the current payment and the new payment into a bank account. Then, when my kids are a bit older and my income is higher, I can always use that money to pay down the mortgage or buy out my ex or what-have-you.

Unfortunately, my ex has no pension and we have always made equal contributions to our individual retirement savings plans. We could still do something with those, but I’m still working out some other options first.
posted by jessamyn (staff) at 1:53 PM on June 3, 2010

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