When going through a divorce, one of the most pressing concerns for the spouse keeping the house is the impact that current mortgage rates will have on their monthly expenses. With the current environment of high mortgage rates, holding onto a low-interest rate can be a tremendous benefit but also a challenge.
In this article, we’ll explore some practical ways you can hold onto your low-interest rate amidst separation and come out financially stable.
- Should I keep the home after the divorce?
While this blog will focus on the options for handling your mortgage after divorce, we will first briefly discuss if keeping the house is in your best interest. Ensuring financial stability is paramount when contemplating the decision to retain the family home after a divorce. While the emotional ties to a shared residence may be strong, there are practical considerations. Before committing to keeping the home, a thorough assessment of one’s financial situation is imperative.
This involves scrutinizing not only the mortgage payments but also factoring in property taxes, insurance, maintenance costs, and other associated expenses. A realistic budget should be established, accounting for the post-divorce income and any potential changes in financial circumstances. Seeking the advice of a Certified Divorce Financial Analyst™ can provide valuable insights into the feasibility of maintaining the home.
- What happens to the mortgage after my divorce?
In most situations, the spouse who is not retaining the family home will need to come off the mortgage. This process, known as refinancing, is essential for several reasons. First, it releases the departing spouse from financial ties to the property, preventing potential complications in the future. Second, it allows the remaining spouse to take full ownership of the mortgage, reflecting the new financial reality post-divorce. Refinancing not only untangles the financial connection but also ensures that the mortgage aligns with the income and creditworthiness of the spouse who will continue residing in the home.
Navigating this process can be complex, but it is a crucial step toward financial independence and a fresh start after the challenges of divorce.
When refinancing the mortgage, the new interest rate will reflect the current mortgage rate environment. In the current high-interest rate environment, this means that your interest rate will likely go up significantly. This will likely cause an increase in your monthly payment. Additionally, when you refinance the mortgage, the spouse who is keeping the home will need to qualify for the mortgage based on their income. This might be a challenge in some situations.
- Is there another option than refinancing to remove my spouse from the mortgage?
There is an option known as a “mortgage assumption” but someone can rarely take advantage of this. Instead of the spouse who remains in the family home taking on the burden of securing a new mortgage, a mortgage assumption involves the transfer of the existing loan to that individual. This would allow for the spouse who keeps the home, to keep the same mortgage rate and potentially avoid issues of qualifying for the mortgage on their own. While not all mortgages are assumable, those that are present a unique opportunity for a smoother transition.
The process involves a thorough evaluation of the assumable loan terms and the financial capability of the remaining spouse to meet those obligations. We recommend that you reach out to your mortgage company to see if your mortgage allows for a mortgage assumption.
- What are my options if I can’t do a mortgage assumption and the monthly payments for the refinanced mortgage are going to be higher than they were prior?
Many people are attached to their low-interest rates. We recommend that people take a big-picture view when they are faced with this situation. This entails understanding not only the current interest rate adjustment but also assessing the monthly payments and the long-term financial impact of a higher rate. There are possible creative financing strategies (such as changing the length of the mortgage) that could minimize the increase in the monthly payment.
Additionally, by factoring potential mortgage options into a long-term financial projection, you might find that a higher monthly payment might not be detrimental to your long-term financial goals. We recommend that people speak with a qualified mortgage advisor and a Certified Divorce Financial Analyst™ to determine the best option.
Additionally, your ex-spouse might be willing to stay on the mortgage for some time. This would likely avoid the need to refinance the mortgage. If you think your spouse might be open to this, you should discuss it with your attorney. There are ways that your marital settlement agreement can reduce the risk that your ex-souse would incur by remaining on the mortgage.
- This is all complex and there are many options. How do I know what is best for me?
It’s also crucial to remember that every situation is different, and there may be other options available that are unique to your situation. It’s always a good idea to talk to a Certified Divorce Financial Analyst™ who can collaborate with your attorney and a mortgage professional when exploring your options. This can help ensure that you are making decisions that will benefit you in the long run.
Work with us
If you have more questions about divorce, our team is here to help you every step of the way. At Purposeful Wealth Advisors, we work closely with attorneys, accountants, and other dedicated professionals to arrive at comprehensive solutions for our clients.
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While we are familiar with the tax/legal provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional. The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of Purposeful Wealth Advisors and not necessarily those of Raymond James.
