I'm buying my husband out of our house in New Jersey. What's the best way to access equity in my home?

By Aarthi Swaminathan

'I won't have a problem getting a mortgage or being able to refinance'

Dear Big Move,

I am buying my soon-to-be ex-husband out of our house in New Jersey.

We are both on the mortgage. We have agreed to a pay-out sum of $135,000. There is enough equity in the house. I have excellent credit and a good paying job. I won't have a problem getting a mortgage or being able to refinance.

What is the best way to access equity? A mortgage? A home-equity line of credit? Refinancing in another way?

The Ex-Wife

'The Big Move' is a MarketWatch column looking at the ins and outs of real estate, from navigating the search for a new home to applying for a mortgage. Do you have a question about buying or selling a home? Do you want to know where your next move should be? Email Aarthi Swaminathan at TheBigMove@marketwatch.com.

Dear Ex-Wife,

Going through a divorce can be pretty messy, so kudos to you and your soon-to-be ex for navigating choppy waters and coming to an agreement regarding the home that once used to belong to the both of you.If you are in the process of getting a divorce and are both on the mortgage, you will need to either sell your house and divide the proceeds, obviously, or buy the other out - which is the option you went for. So what now?

There are two ways to extract the equity in the home: Either you refinance the mortgage into your own name with a view towards extracting equity, or take on a home-equity line of credit or HELOC for short.

What's the difference? With a refinance, you're going to modify the terms of the current mortgage you have, and with a HELOC you are leaving the original mortgage untouched by taking on a secondary loan.

Since you need to remove your partner from the property title, a refinance is your best bet, and since you're taking that route, a cash-out refinance in particular may make sense, says Ann Sullivan, a loan officer and a team lead at Pennsylvania-based Lending Heights.

A cash-out refinancing is where a homeowner takes on a new mortgage loan - which has a different term, a different interest rate, and a period to pay it off. This cash-out refinancing will give you a new and larger mortgage, which will allow you to pay off your existing first mortgage and leave some cash for you to use as you wish, according to Rocket Mortgage.

But beware of the pitfalls of a cash-out refinancing. When you take on such a loan, you are borrowing more than you owe on your current mortgage. People who do a cash-out refinancing often use it to "pay down other debts, fund home repairs, and pay for educational expenses, among other big-ticket purchases," according to a report released by the Consumer Financial Protection Bureau last year.

On the other hand, a home-equity loan or a HELOC leaves your first mortgage untouched. You're only taking on more debt with a secondary loan. But the problem with a HELOC is that you might still have to refinance, because you need to remove your ex from the mortgage.

The other challenge you'll face: higher interest rates. Sullivan said that HELOC interest rates are typically higher than the 30-year mortgage rate, depending on the financial institution. "So for example if the prime rate is 7% those rates would be 9% or 10% just as a range," she adds. And that adds hundreds of dollars in extra borrowing costs.

There is, however, a bonus third option for you to consider: a home-equity loan. Unlike a HELOC, which is a revolving line of credit - like a credit card - a home-equity loan allows you to access your money upfront.

Nonetheless, "sometimes people like to have a HELOC available to them against their equity as a financial safety net to tap into if and when needed," Sullivan says. A home-equity loan, on the other hand, is a fixed-interest-rate loan, and needs to be repaid over a fixed period of time, which people might find a little rigid.

Figure out what makes the most sense to you, and what will be easier to pay off in the years and decades to come. The last thing you want is to end up underwater on your mortgage - owning more than your home's market value.

Talk to several local lenders and see who has the most favorable terms with the lowest interest rate. There is no need to rush this decision, if you have a good job with decent income and can still pay the remaining mortgage balance by yourself.

Just make sure you aren't leaving money on the table. Research from housing-finance giant Freddie Mac has shown that getting just one additional rate quote could save home buyers an average of $1,500 over the life of a loan - and more than 5 quotes saves a borrower about $3,000.

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-Aarthi Swaminathan

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09-09-24 0614ET

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