Refinancing Your Home During a Divorce: How a Seattle, Washington Collaborative Divorce Lawyer Can Help
If you’ll be keeping the family home in your divorce (putting the title in your name alone), but the mortgage is in both you and your former spouse’s names, you’ll need to refinance.
You can’t just “take over the mortgage” or “take your partner’s name off” a mortgage you share. People refinance their mortgages for many reasons, but when people refinance during a divorce, they are typically taking out a new mortgage in their name to pay off the old mortgage that’s in both partners’ names.
While refinancing is the “cleanest” option if you want to keep the house in your divorce, the Seattle, Washington Collaborative divorce lawyers at Truce Law can help you explore all the options that may be available.
It is technically possible to put the title of your home in your name alone and keep the mortgage in both partner’s names. In most cases, your former spouse will not want to pay for or remain obligated to a mortgage on a house they don’t own.
Yet, there could be exceptions to this rule, like a separation agreement where one spouse continues to pay his or her share of the mortgage instead of alimony, for example. But, in most cases, if you’re keeping the family home, and you share a mortgage with your spouse, you’ll need to refinance during your divorce.
When you refinance, you are essentially applying for a new mortgage. The new mortgage may come with new terms, new requirements, and a new interest rate. With refinancing, you use the new mortgage to pay off your old mortgage.
If you’re refinancing because you’re getting divorced, you’ll be applying for a mortgage as a single person to pay off the mortgage you and your spouse got together when you were married. Your bank will need to consider whether your income, credit, debt load, and assets as a single person are sufficient to qualify for the new mortgage.
To make matters more complicated, now is not really the best time to refinance your mortgage if you’re looking for better interest rates. Interest rates are currently rising, and all reports indicate that they are likely to keep going up.
Yet, this doesn’t automatically mean you’ll be stuck with a higher interest rate when you refinance your current mortgage, nor does it mean that if you refinance, you’ll be stuck with higher monthly mortgage payments.
There are many refinancing options available if you’re getting divorced. Some could lower your monthly mortgage payments (something that might be helpful especially if you’re shifting from a two-income household, to a one-income household).
You might even find you have better mortgage options now than when you applied with your partner, either because your credit has improved, your financial situation has improved, your home equity has grown, or you may even find that interest rates are better today than when you got your mortgage many years ago.
Of course, refinancing isn’t the only option you have for the family home. If you’re getting divorced, not everyone who wants to refinance will qualify for a new mortgage on a single income.
In this situation, a common solution is to sell the family home, pay off the mortgage (if there is one), and split the remaining proceeds. You might find that this option will give you the chance to put a down payment on a smaller space, maybe one that better fits your new life.
Another, less common option is known as “nesting.” This is an arrangement where the children continuously reside in the family home, while each spouse splits time in the home with the children. Generally, this option is great if both you and your spouse can afford your own independent spaces and afford maintenance of the family home.
The option that involves refinancing is a divorce arrangement where one spouse might keep the family home, while the other might receive other similarly valued assets like retirement accounts, savings accounts, or investments. In some situations, one spouse might keep the family home without giving up other assets in exchange for not seeking alimony.
When it comes to deciding who gets to keep the family home if there’s a dispute, division of property laws come into play, and here it is helpful to have Truce Law on your side. Our Seattle, Washington collaborative divorce lawyer can help you understand your options and rights as you and your former spouse navigate this process.
Seattle, Washington, Collaborative Divorce Refinancing Options
What are your refinancing options if you’re getting divorced? Let’s take a closer look at each and explore some of the ways these options could help you reach a divorce agreement that can work for both you and your former spouse.
1. Cash-Out Refinance
With a cash out refinance, your bank will perform an appraisal of your home to determine what it is worth, and then, if you qualify, give you the option of taking out a new mortgage loan for up to 80% of what your new home is worth.
The new mortgage in only your name will pay off the old mortgage in both you and your former partner’s names, and any leftover cash is yours to do as you wish.
Why would this be helpful in a divorce? Let’s explore this with a case study. Let’s say you and your former partner own a home appraised at $300,000. Your current mortgage is $100,000, and both you and your former partner share $200,000 in equity.
If you were to sell your home today, you’d probably make around $200,000 in the sale, which you could split, meaning each of you would leave with $100,000.
But if you want to keep the family home after your divorce, you could find yourself in the tough situation of coming up with the $100,000 to pay off your former spouse’s share of the home. A cash-out refinance could come to the rescue if you qualify for this type of refinance on your own.
Because you can refinance up to 80% of your home’s value, in this case, you’ll likely be able to get a new mortgage worth $240,000. This new mortgage will pay off the $100,000 you owe on the old mortgage, leaving you with around $140,000 in your pocket. (You’ll likely end up with a little less because of closing costs).
You can give your former spouse $100,000 in the divorce settlement to pay off his or her share of the house and get to put the title in your name alone. The extra money can go to paying legal fees, debt, home improvements, or other expenses you might find yourself facing because of the divorce.
It is important to keep in mind that a cash-out refinance is not free money. You’re taking out a loan backed by your home as collateral. If you can’t pay the mortgage, you run the risk of losing your home. Therefore, it is very important to consider whether you could afford a cash-out refinance on your own, or whether it just makes sense to sell the home and split the proceeds.
2. No Closing Cost Refinance
Let’s say your home equity is right on the edge of what you need to pay your former spouse to buy-out his or her share of the home. In this case, you can speak to your bank about whether a no closing cost refinance might be able to help you keep more money in your pocket.
A no closing cost refinance can cost you more over the long-term because the closing costs will be folded into your monthly mortgage payments, and you also might find yourself with a higher interest rate if you choose this option.
But if you find yourself in a situation where the $4,000 or $5,000 in closing costs could mean the difference between paying off your former partner’s equity, or having to sell the home, a no closing cost refinance might be something you might want to explore.
3. Cash-In Refinance
Another option might be to refinance your mortgage where you pay cash in to reduce the balance of the mortgage, rather than taking cash out.
This option might work if you may not be able to afford the current monthly mortgage payments on your income alone, but you share savings or investments with your former spouse, and find that by paying down the mortgage, you can reduce your monthly mortgage payments enough to afford them.
If you don’t qualify for the current mortgage, but might qualify for a smaller one, a cash-in refinance might be the solution. Truce Law’s Seattle, Washington collaborative divorce process might be able to help you find innovative divorce solutions that could help you keep the home.
For example, if your spouse would have had to pay you alimony, one option would be to receive a lump-sum alimony payment that you could use for your cash-in refinance.
Remember that when you apply to refinance on your own, the bank will look at your individual income, credit score, debts, and assets. You might find that you qualify to borrow less on your own than you qualified with your former spouse.
A cash-in refinance can reduce the amount you’re asking the bank to borrow. It may also qualify you for lower interest rates. But even if your interest rates end up higher, you could still find yourself paying less each month.
A cash-in refinance not only reduces the balance of what you owe, it can also re-set the repayment clock to 30 years. Because you’ll be paying off less money over a longer period of time, this could also reduce your monthly mortgage payments.
Finally, if a cash-in refinance increases your equity (equity is the value of your home minus what you owe on the mortgage), you might not need to pay for mortgage insurance each month.
If you and your spouse have cash savings, investments, or even retirement accounts, or if one of you has more financial resources than the other, you might want to speak to a Seattle, Washington collaborative divorce lawyer at Truce Law to explore how cash assets or investments might be split in your divorce.
A divorce lawyer in Seattle, Washington at Truce Law can also help you explore whether a lump sum alimony payment could give you the cash-in boost you need to qualify for a refinance to keep the family home.
4. Rate and Term Refinance
When you refinance your mortgage, you are generally re-setting the clock on when you must repay the loan. So, if you take no cash out when you refinance, and simply refinance your mortgage in your name alone, you’ll likely apply for another 30-year mortgage.
Assuming you and your former spouse have been paying down the other mortgage over the years, this means that you’ll be spreading out the remaining debt over a longer period. You’ll likely pay less each month even if interest rates are a little higher.
(You’ll still probably pay more over the term of the loan if interest rates go up, but for many divorcing individuals, money in your pocket right now as you adjust to a new financial situation might be worth paying a little more over the long-term.)
Let’s look at the case study again. Let’s say you owe $100,000 on a mortgage you’ve been paying for 15 years on a 30-year mortgage, and own $200,000 in equity on a $300,000 home. If you refinance to a 30-year mortgage today, you’ll be spreading out the $100,000 in debt you would have paid off over 15 years, over 30 years.
As you can see, even if interest rates go up a little, you’ll still likely be paying less each month on your mortgage.
A rate and term refinance can help you if you and your former spouse had a 15-year term on your mortgage. A 30-year mortgage will cost you less each month than a 15-year mortgage, and may allow you to qualify to borrow more. By refinancing, you can either extend or shorten the term of your mortgage to meet new financial demands after divorce.
5. Reverse Mortgage
If you are 62 or older and own significant equity in your home or own your home outright, a reverse mortgage might be an option. With a reverse mortgage, the bank pays you each month. This isn’t free money, though. With each check, the amount you owe on the reverse mortgage increases.
If you move out of the home, or sell the home, or pass away, your heirs will either need to sell the home and pay off the mortgage or pay off the reverse mortgage before they can inherit a clear title to the home.
If you and your spouse are 62 and older, retirement funds and savings might play a big role in the negotiation of your divorce agreement. The spouse who keeps the home may be able to tap into a reverse mortgage option to fund his or her retirement. Like a 401(k), reverse mortgage income is tax-free.
If one spouse will keep the 401(k) and the other will keep the home, the reverse mortgage option is one thing to consider when brainstorming about how you and your spouse might still enjoy the retirement you’ve worked hard for.
Key Things to Keep in Mind
These are just some of the options that may be available. FHA, VA, or USDA loan options backed by the government may give you even more options and may even give you the opportunity to tap into even more equity in your home.
If you find yourself in an underwater mortgage (that is, a situation where you owe more on your mortgage than your home is worth), you may be able to work with your lender to refinance your mortgage to the current value of your home, saving your home from foreclosure in divorce.
When applying to refinance, it is wise to shop around with different lenders. Different banks might offer different rates, and you may qualify for a refinance with some banks and not with others. Your current mortgage lender may also be able to work with you to help you find a refinancing option you can afford.
It is understandable why you might want to keep the family home. Many people have a sentimental attachment to the home where their children were raised or where they built a family. But it is important to remember that refinancing comes with risks as well as benefits, and you’ll need to take stock to determine if you can afford the mortgage on your own. When you refinance, you’ll have to pay closing costs, which can be as high as 6% of the value of the loan. Refinancing also comes with risks. If for some reason you can’t pay the mortgage, you could lose the home to foreclosure.
In some cases, it might just be better to sell the home, collect your share of equity, and start fresh. If you do want to keep the family home, there are divorce settlement options that may be able to make this possible.
If you have other assets or are entitled to receive alimony, you may be able to work out a divorce settlement with your former partner that lets you keep (and afford) the family home. A collaborative divorce lawyer in Seattle, Washington at Truce Law can look at your marital assets and help you explore your options, often with the help of an accountant or financial advisor.
Finally, it is important to remember that refinancing the home may not affect the title. If both you and your partner’s names are on the title, you’ll need to make sure that’s changed during the recording process.