Mortgage and Refinancing Basics after Divorce
- Refinancing vs. selling
- Updating your mortgage to reflect your decisions
- Benefits of refinancing
- A closer look at the cash-out refinancing process
- What if you don't refinance after divorce?
- Does divorce affect your home equity?
- Can I get a divorce mortgage loan?
- Who can I turn to for help?
One of the most challenging decisions a divorcing couple must make is what to do with the marital home. You have several options, one of which is refinancing the mortgage. In so doing, the property can be placed under the name of just one spouse, effectively removing the other person's name from the mortgage. After the home is refinanced, the sole mortgage payor could keep the house or sell it and split the proceeds with their ex.
Another option is selling the home without refinancing it. In this case, each spouse would receive a portion of the profit. Depending on the state in which the spouses live – community property or equitable distribution – the proceeds might be divided 50/50 between them or another way.
It can be hard to think your options through when your head is swarming with different divorce-related emotions. In this article, we explore what it means to refinance a home after divorce and highlight the benefits and drawbacks of doing just that.
Refinancing vs. selling
If you opt to refinance your home after divorce, you are likely doing it so only one spouse remains on the mortgage. In this situation, the person on the mortgage is the now the only person responsible for monthly payments.
If you decide to sell your home after divorce, you and your ex could split the mortgage payments until the property is sold. (Note: If one spouse moves out while the property is on the market, the spouse who remains in the home usually pays for the mortgage on their own.) Once the property is sold, the proceeds may be split 50/50 or as per your divorce decree.
Updating your mortgage to reflect your decisions
If you and your spouse jointly agree on what to do with the home, you can update your mortgage to reflect your decisions. "Agree" is a key word here: Both spouses must agree on the plan before taking action. Note that even after you make this decision, a judge could theoretically go against your proposed settlement agreement in your final divorce decree. While this is unlikely, it's possible – especially if the agreement appears to be an inequitable division of assets.
Benefits of refinancing
One spouse can keep the home; the other can get a payout: While post-divorce refinancing offers many benefits, the primary advantage is that only one spouse remains on the mortgage. In return, the other spouse may be able to receive money that essentially pays off their share of the home. When refinancing, a quitclaim deed can be used to effectively remove the name of one spouse following a divorce.
Spend less money each month: Since a portion of your current home loan has probably already been paid, the size of your monthly refinance loan payments should be smaller than your current mortgage payments. Thus, whoever is still named on the mortgage will likely have a smaller monthly payment to make.
The kids may benefit: Some divorcing parents decide that one parent will keep the home and stay there until the children reach 18. This allows the kids to stay with their friends in their current school district. For many families, mortgage refinance makes this scenario easier to achieve.
One spouse may be able to buy out the other: In the event that equity has built up in the home, said equity can be used to buy out the other spouse's share of the home. In other words, the person who applies for a new mortgage can ask for more money than they actually owe. This puts cash in their pocket which can easily be transferred to the other spouse's pocket. This process is known as a cash-out refinance.
Drawbacks of refinancing in divorce
Your credit report and income may affect your ability to refinance. Before you attempt to refinance your mortgage, keep in mind that the spouse who intends to stay on the mortgage (keep the home) must apply for a new mortgage on their own. Their credit score and income will be scrutinized by the mortgage company, and because they're doing this alone, they won't be able to use their ex's good credit or income to score a better deal.
The new loan may have a higher interest rate. Mortgage rates fluctuate. It's possible that the spouse who takes out the new loan won't get an interest rate as low as their first one.
You may lose equity in your home. Above, we mentioned that a cash-out refinance can put money in your pocket. But of course, there's a catch: In so doing, you lose equity in your home. In other words, you can't rely on getting that money later for another purpose if you use your home's equity now for divorce purposes.
A closer look at the cash-out refinancing process
Once you've gone through the cash-out refinancing process that allows you or your spouse to receive a share of the home in cash, the process can be followed up by applying for a home equity loan. Notably, during the cash-out refinancing process, only a portion of the equity can be taken out by the borrower in a lump sum.
The sum can then be given to yourself or your ex-spouse. Some equity will need to be maintained to cover the standard down payment and closing costs. However, you could recover the remaining equity with a home equity loan as part of your divorce settlement. A home equity loan allows you to borrow against the current equity in your real estate to make sure everyone receives their fair share.
What if you don't refinance after divorce?
Even if you want to refinance your mortgage following a divorce, doing so may be impossible if the financial situation of the person applying for the loan isn't good enough. If you can't refinance after your divorce, the next best option may be to simply sell the home. This would allow you and your ex-spouse to each receive a portion of the proceeds.
Does divorce affect your home equity?
Getting a divorce doesn't directly affect your home equity unless you decide to refinance your home. Both spouses are essentially entitled to 50% of this equity, which is why the home would likely need to be refinanced or sold altogether.
Can I get a divorce mortgage loan?
Once your divorce has been finalized, you should be able to obtain a mortgage loan without experiencing significant delays or problems. It's only during the divorce proceedings that a quitclaim deed may need to be signed by your ex-spouse. This action takes away their marital right to the home you're applying to finance.
Who can I turn to for help?
Whether you decide to refinance your home or sell it post-divorce, the assistance of a divorce mortgage specialist can prove invaluable. With extensive financial and legal knowledge, a divorce mortgage specialist can help you avoid costly mistakes and other pitfalls.
Related reading: Is It Better to Buy or Rent Your Home During and After Divorce?