Tips for Splitting Assets: When Entrepreneurs Divorce

The owner of the Los Angeles Dodgers, Frank McCourt, is in divorce talks with his wife Jamie, the CEO for the team. This power couple is one of 1.2 million husband-and-wife teams who run a business together, according to the National Federation for Independent Business. And when couples split, often so can the business.

John Moores sold the Padres earlier this year as a result of the petition for divorce his wife, Becky Moores, filed a year earlier. They then divvied up the proceeds.

It is rare that couples who divorce can remain doing business together. So, what should you do with your business assets if you divorce from your spouse with whom you do business? Here are some tips.

Buy the other spouse out. This is a good choice if one spouse started the business, or is more passionate about it. You can trade his or her stake for other assets, such as equity in the home or a greater share of the retirement accounts. Or you can take out a loan to pay cash.

Sell it and divide the profits. Some small businesses are tough to sell, especially in today’s economy, but if the company operates profitably, then it’s possible to find a buyer. Start seeking buyers sooner rather than later before any divorce animosity can tour the business sour.

Split it in two. This only works well if the company has separate units that can be spun off from one another. If you go for this option, you may want to have a valuation done to determine the worth of each unit. Because once the company is split and the divorce is final, it will be a lot harder to go back and make a claim to other business if yours fails and your ex-partner’s takes off.

Speed up the succession plan. Since many family businesses often name children as successors, a divorcing couple with adult children may be able to choose this option. Each spouse could possibly stay on as a silent partner with a small stake in the business, so long as you are willing to let your children run the business. This is hard to do even when divorce is not part of the picture!

Should You Pay Points on a Home Purchase?

By Lynnette Khalfani-Cox, The Money Coach

Mortgage interest rates are at historic lows. If you have great credit with a FICO score above the mid-700’s, these days you’ll probably qualify for a rate below 5%. Despite the low rates, if you make a home purchase, should you pay points to lower your rate even more? Generally, my answer is “No.”

What is a Point?
A “point,” also known as a “discount point,” is a fee that costs you one percent of your loan amount, and will typically knock about 1/4 to 1/8 of a percent off your interest rate. It might take 4 points or more to bring your interest rate down one full percentage point.

While it might sound like a good idea to pay a one-time fee up front in order to “buy down” your interest rate, in reality, paying points is often a money-losing game.

Consider This Scenario
Say you apply for a $250,000, 30-year mortgage loan at a 5% fixed interest rate with no points, your monthly payments would be $1,342.

If you then wanted to pay one point to buy down your loan rate to 4.75%, it would cost you $2,500 (almost two months worth of mortgage payments, in this case). Your new payments would be $1,304, a savings of $38 a month or $456 a year.

If you divide the cost of that point by your yearly savings, you will find that it would take you about 5.5 years to reach the break-even month on the cost of that point.

So if you knew for certain that you were going to stay in your home for more than 5 and a half years, then buying the point might be worth it. You also, however, would have to be certain that you will not refinance your mortgage within those 5 years. Although you might think you wouldn’t want to refinance given how low your rate would be, you also can’t say for certain if what I call the “Dreaded Ds” (divorce, disease, disability, or death in the family) might occur, making it necessary for you to refinance.

Another Savings Option
However, a safer bet on yearly savings without having to worry about when you might move, is to use that $2,500 to lower your mortgage loan amount and instead take out a loan for $247,500 with monthly payments of $1,328, which would be $14 a month less than on a $250,000 loan, and a savings of more than $10,000 in interest paid over the life of the loan.

Advantage to Paying Points
I must admit, the one advantage to paying points on a home purchase is that they are tax deductible in the year you pay them. If you can get a seller to pay the points for you at closing, then it’s not money out of your pocket, you lower your rate, save interest over the life of your loan, and you can still take the tax deduction. Ideally, however, you personally shouldn’t pay for any discount points on a mortgage.

For more information on selecting the right mortgage, see my book, “Your First Home: The Smart Way to Get It and Keep It.” It has a lot of helpful tips even for those people purchasing their second or third home.

6 Steps to Determine If You Qualify to Modify Your Mortgage Loan to Lower Monthly Payments

By Lynnette Khalfani-Cox, The Money Coach

Under Obama’s “Making Home Affordable” loan modification program, owners who are in risk of losing their home or are on the verge of not being able to make their monthly mortgage payments may be eligible to have their monthly mortgage payments reduced down to as much as a 2% interest rate to help them meet their obligations.

To determine if you qualify for the program you must answer yes to ALL of the following questions:

1. Loan Date: Was your loan taken out (originated) prior to January 1, 2009?
2. Primary Residence: Is the property where you want the mortgage modified your primary residence? (If it is a vacation home or rental property where you don’t live, you will not qualify).
3. Number of Units: Do you own a single-unit property or one with four-units or less? (If you live in one unit of the building and rent out one or more units in the same building, up to three units, then you will still qualify).
4. Mortgage Balance: Do you have an unpaid principal balance that is equal to or less than $729,750? (This limit can be higher for four-unit properties.)
5. Monthly Payments: Do you have a mortgage payment (including property taxes, insurance, and home owners association dues) that is more than 31% of your gross (pre-tax) monthly income? If you’re not sure, use this tool to determine the percentage.
6. Cash-Strapped: Are you having trouble paying your mortgage or are on the verge of doing so? (Answer yes if you are 31 days or more late on your mortgage payments, have had a major reduction in your income since taking out your loan, or have suffered some major financial hardship such as mounting medical bills, financial issues related to divorce, or just had or are expecting a balloon payment coming due or mortgage rate increase from an ARM.)

If you answered yes to all of the questions above, you may qualify for the loan modification program and can move on to the next step, as outlined by the government at Making Home Affordable site.

If you are not in financial hardship and are current on your mortgage, but would like to take advantage of current low interest rates and can’t because there is not enough equity in your home, you might qualify for the Refinance plan under Making Home Affordable program. Check here for my article about the Refinance plan.