August 1, 2016
After a divorce is completed one or both of the parties may have an immediate need for cash. There are various reasons for this, including:
Coming up with cash is not always easy. In my experience most of the couples I have worked with are not sitting on a pile of cash in the bank. However, there are a few ways to tap into the estate and generate the needed money.
Refinancing the home. Usually the biggest asset the couple has is the equity in their home. In order to create a fair settlement some of that equity needs to be shifted from one spouse to the other. Refinancing the mortgage to take out some of the home equity is one way to find cash. Unfortunately this is not always possible, especially for a spouse who has low income, a short history of alimony or child support payments (up to 24 months of income is required by some banks) or a poor credit history. Working with a good mortgage broker is important in these circumstances.
A home equity loan or line of credit is another possibility. Like refinancing, the homeowner will have to pass some qualification parameters.
For homeowners over the age of 62, a reverse mortgage is a tool that allows the equity to be accessed without the need to make loan payments. As long as the homeowner lives in the house the loan interest will accrue, and is paid back when the house is sold. Reverse mortgages are regulated by the government and should be used only after careful consideration.
Tapping into retirement accounts: Often the parties look to their retirement accounts for cash. There are a number of ways to access cash here:
Tapping into taxable investment accounts: If there is a taxable brokerage account, such as a joint investment account, the owner may be able to borrow on margin. This means the owner can borrow an amount based on the value of the securities in the account. This is appealing to those who don’t want to sell their securities but need cash. While margin balances can be carried for an indefinite period (although interest is charged), it is important to know that a margin loan can be “called”, or required to be paid down, if the underlying securities fall below a specific value.
It is imperative to consult with a Certified Divorce Financial Professional or accountant before using any of these strategies so that there is a full understanding of expenses, taxes and penalties.