Q: I bought my house 20 years ago and today it is worth $300,000. I owe about $150,000 and have about 10 years left on a 15-year mortgage. The interest rate is 5.125 percent, and my monthly payment is $1,550.
Here is the problem: I am a Physician Assistant working in Illinois, a state which is known for no caps on medical lawsuits. If you are married, your house cannot be “taken” but if you are single, your house is vulnerable if you lose a medical lawsuit (even if you have medical liability insurance, which I do through my employers).
My Sweetie and I “can’t” get married for 2 more years (to stay eligible for a pension – I lose it if I get married before age 55.) Other doctors and financial advisors have recommended “not owning too much” of your real estate if you practice in Illinois as a single person. Therefore, even though I could make extra payments to my principal, I have not.
The current interest rates are really attractive especially with a 10-year mortgage. Should I refinance, knowing I will only be saving $50 per month (calculating in the refinance costs)? Should I take out extra to fund my IRAs (which are protected against medical lawsuits) and therefore own less of my house?
Thank you for your time. Love your column! May you be in great health.
A: There are several ways you can protect your property in case you are sued. First, you can set up a trust. There are several different types of trusts, but ideally, you’d put the property into a trust that that still allows you to use the home but would protect the home from creditors.
An estate planning attorney could help you structure the type of trust. With some lenders, you might not have the same ability to refinance the property as you would if the property was in your name. Before you put the property in a trust, you’d want to make sure you understand the consequences of having the property in the trust and your ability to finance the property and control it in the future.
If you’re trying to keep things simple and don’t want to “own” much real estate, you might consider a larger mortgage on the home. At these lower interest rates, you’d pay about the same monthly mortgage payment, but your loan amount would be much higher. While you might lose the home due to litigation, you lose much less than what you currently have in your home if you pull out equity now in a refinancing. If you have that cash from your home, you can invest it into your retirement.
We’re not fans of having you pay off your mortgage with your retirement savings. We’d rather see you save for retirement than pay the penalties for early withdrawal from your retirement savings accounts and then pay tax on that money as well. While you’d have a smaller mortgage, you’d have more equity in the home that could be lost if you are sued for medical malpractice.
Medical malpractice insurance is expensive, but that insurance protects you from the litigation you seem to fear. Have to tried to price out what it would cost you to increase your insurance coverage? You might find that increasing the coverage you have can give you the peace of mind you’re looking for. It may be possible to lose a huge medical malpractice case, but those huge cases might be rare in your practice area.
Once you marry, you and your spouse can refinance your property and hold it as joint tenants with rights of survivorship. You can also hold your property in tenancy by the entirety, in which means that each of you owns the entire property, rather than simply owning equal shares and you have added legal protections against creditors.
You should be aware that married couples might have certain “protections” when they own their primary residence together but that protection can be quite limited. Owning property in tenancy by the entirety might keep your home safe from creditors for a while, but in some states that would only occur while you and your husband own the property and use it as your primary residence. If you get divorced, if either spouse dies or if you cease using the property as your primary residence, creditors can try to get their hands on your home.
Due to your special circumstances, and the fact that you’d only save about $50 per month, you might be much better off plowing cash into your IRA or other qualified retirement account. Do you qualify for a Roth IRA? That’s a great way to shelter another $5,000 per year, or $6,000 if you’re over the age of 50.
What you need to do is spend some time with an estate attorney or estate planner, who can advise you on the best way to hold title to the property until you feel you can marry. Even once you are married, if you feel that you are at risk in your line of work, you’d want to decide how to handle your ownership interest in the home and other assets. This estate attorney or planner should look at all aspects of your estate, and make recommendations that will resolve not only this dilemma, but also others that you might face in the future are facing.
For example, you and your sweetie aren’t married, so if one of you should have a health issue, the other would have no legal standing to make decisions. It would be a good time to consider powers of attorney for health care and financial matters and other general estate questions as you ponder your situation.
If your significant other isn’t the person you want making those decisions, then you and your estate attorney or planner should figure out how you’re going to handle these issues, and write a legal will that will designate your power of attorney and heirs. All of this, by the way, is more important than refinancing – especially since mortgage interest rates are expected to stay extremely low until at least the beginning of 2015.