Last night, I had a meeting with one of my clients who showed up for the first time without her husband. I am not a rocket scientist, but I assumed before we met that everything wasn't copacetic at their residence. I was correct. It appears that she is about to file for divorce and needed some advice about her financial situation. After 15 years of marriage, she and her husband had about $150,000 equity in their house and just a few minor bills. Both were making decent money. She had six figures in 401(k) plans, and he had at least three pensions that he would be receiving--not too tough a situation and certainly easy for me to analyze for her.
She said she didn't want any of his retirement and expects that he will not want any of her retirement. Because she makes more, she is liable for alimony for about 2.5 years which really only totals a small amount of money. He most likely will opt for retirement from his current job at 64 which is about four years away and will probably earn as much as he is now from the three pensions. She doesn't feel she will be able to retire because of finances for at least ten years which would put her at 65 years of age. (Retirement to her is reducing the stress of her current job and doing something more "fun" but not quitting work.)
Here is what I suggested would work best for her. She wants to sell the house, purchase a townhouse and go on with her life. She didn't know how much she should put down, what type of loan to take and whether she should continue making large contributions to her 401(k) plan.
She wants to buy a townhouse which would cost about $375,000. I suggested she put down 20% ($75,000) and take a 15 year loan. She can easily qualify for a 15 year which would have payments of about $2500 a month (high 5%). The loan would cost her about $650 a month more than a 30 year fixed. Her gross income exceeds $10,000 per month.
By taking the 15 year she achieves the following:
Monthy payment: $1850 per month
Payments for 15 years: $333,000
Balance in 15 years: $216,000
$2500 per month:
Payments for 15 years: $450,000
Balance in 15 years: 0
At age 70, she will have a house that is free and clear and her investment of about $118,000 in additional payments over the 15 years she will have made on the property will yield her $216,000: the balance she would have owed on the 30 year fixed. She should have enough money at that time, along with her social security and 401(k) investment, to live comfortably for the rest of her life even if her townhouse doesn't appreciate. (See "Appreciation doesn't matter" Dec. 4, 2006).
Roger Schlesinger's Mortgage Minute is heard on hundreds of radio stations and daily on the Hugh Hewitt radio show and Michael Medved shows. Roger interacts with his hosts and explores the complicated financial markets in order to enlighten his listeners and direct them along their own unique road to financial freedom.