Unquestionably, divorce can be messy and stressful–never more so than when properties are involved. For many divorcing couples, the disposition of mortgaged property is one of the more significant and consequential issues they face.
In 2022, more than half of divorced couples were homeowners. And, while the divorce rate has shown a positive declining trend since 2000, it still happens. When it does, we want to help divorcing homeowners understand how to improve their situation.
When it Makes Sense to Sell the Home
A critical consideration for divorcing couples is whether it makes financial sense for one or the other to keep and live in a co-owned property. Many times, it doesn’t. On its own, divorce doesn’t’ release either spouse from the mutual debts of their marriage. And, though a house is a significant asset, it doesn’t necessarily help to pay the bills. In fact, it can often be a financial drain. In those situations, it may make more sense to sell the home, divide the assets, and use the proceeds to find more suitable living arrangements.
Options for One Spouse Remaining in the Home
However, for those who want to keep a house under a new financial and ownership arrangement, there are several options to consider. In most cases, a divorce settlement requires that one spouse is removed from the mortgage and title of the home while the other assumes ownership and takes over the mortgage. Fortunately, there are several well-established paths for achieving that.
Release of Liability
Divorcing couples choosing to keep one of the partners in the home will need to remove the other from the mortgage via a release of liability. A release of liability is a document provided by the lender servicing the loan, releasing a borrower from their responsibility to pay the loan. That requires the person remaining on the loan to qualify for the mortgage to confirm they have the capacity to pay the mortgage on their own.
Many lenders don’t offer these because it makes the loan riskier for the lender. That’s why a refinance is more commonly used.
A cash-out refinance allows homeowners to refinance their mortgage for more than the outstanding balance—converting home equity into cash while removing the vacating spouse from the existing mortgage. The cash-out refinance route may be a good option for those that need to convert home equity into cash to pay out the vacating partner’s portion of home equity. For example, if the home has $200,000 of equity, the vacating spouse might receive $100,000 in a 50/50 equity split.
Rate and Term Refinance
Like a cash-out refinance, a rate and term refinance allows homeowners to update their existing mortgage, including the interest rate, term, and the people listed on the mortgage. Rate and term refinances typically have lower rates than a cash-out, so this route often makes sense when you don’t need to take out home equity to pay out the vacating spouse.
Mortgage vs. Title
While a mortgage defines responsibility for the mortgage payment, a title defines property ownership. If both spouses are on the title, the vacating spouse will need to be removed from the title during the refinance process.
If the vacating spouse is only on the title and not on the mortgage, homeowners can update the title through a quit claim deed, a legal document that transfers the property title from one party to another.
Learn Your Options with a Mortgage Pre-Approval
Divorcing couples choosing the refinance route can contact a lender to review their options. It’s important to note that only the spouse remaining on the mortgage will be able to use their income and assets to qualify, which could include any alimony and child support payments they will be making or receiving.
Don’t Go It Alone
Divorce is a complex process with many financial intricacies to consider. The disposition of mortgaged property is a critical issue that needs careful evaluation. It is imperative that you understand all your options – be it selling the home, refinancing the mortgage, or transferring property titles – and make an informed decision that best suits your individual circumstances and financial health. Remember, the end of a marriage doesn’t have to mean financial turmoil.
At URS Advisory, we are here to guide you through this challenging period and help you make decisions that will set you on a path towards financial stability and independence. If you need help navigating through these financial waters, don’t hesitate to reach out. Click here to schedule a conversation with us, and together, we can help ensure that you’re making the right financial decisions during this difficult time.
URS Advisory LLC does not offer tax planning or legal services but may provide references to tax services or legal providers. URS Advisory LLC may also work with your attorney or independent tax or legal counsel. Please consult a qualified professional for assistance with these matters. You should always consult with a qualified professional before making any tax or legal decisions.