Despite divorce rates falling steadily over the past few decades, it remains a strong possibility than a once happily married couple might decide to split up. When divorcing, one of the most confusing and contentious issues a couple faces (aside from custody battles) is often the matter of deciding what to do with the family home.
While the most advisable course of action may vary somewhat with each situation, it’s always vital to make any discussions about the mortgage front and center. Your home is likely your biggest shared asset, and your decisions about the mortgage will impact both of you for many years to come.
If your ex will be the party taking possession of the marital home, remember you will be liable for your shared mortgage until the home is sold, the mortgage is paid off in full, or your ex refinances to remove your name entirely.
You see, removing your name from the title of the home does not
absolve you of legal responsibility for the mortgage! This is a common misconception that has resulted in financial harm for countless divorced homeowners. As long as your name remains on the mortgage, your credit is at risk for substantial, long-lasting harm.
If you’re the party remaining in the home, you’ll probably be required to buy out your spouse’s share of the home’s equity. Refinancing your home will allow you to take out a cash portion of that equity to use as you wish
—including paying off your spouse so they no longer have any claim to your home.
For example, let’s say that Amy and James purchased a $450,000 home together while they were married. Their outstanding mortgage balance now, at the time of their divorce, is $300,000. The remaining $150,000 is their shared equity in the home. If their divorce terms state that Amy and James are splitting their assets 50/50, Amy would have to come up with $75,000 to buy James out of the home.
Unless Amy has a suitcase full of cash lying around (or a healthy retirement fund), she’s going to want to refinance the home in her own name
with a cash-out agreement, then use cash from the home’s equity to pay James what he’s owed. Afterward, she can transfer the home into her name alone.
If you’re like Amy and you want to buy out your former spouse, your first step toward taking sole ownership of the property is to figure out the exact amount of your share of your home’s equity. Here’s how to do it:
- Find out the home’s current value.
- Subtract your outstanding mortgage balance from this number.
- Calculate your percentage of the remaining equity based on the terms of your divorce agreement.
In order to determine your mortgage balance, ask your lender for a “payoff” total. This figure, once balanced against any equity lines of credit, second mortgage, or outstanding debts against the property, is your balance.
Now, your portion of the equity depends on the terms you’re able to negotiate in your divorce settlement. This usually hinges on factors like whether the two of you purchased your home together, whether the home has been paid for equally since it was purchased, and whether or not the home is covered by a prenup.
Of course, paying off your ex and securing sole ownership isn’t the only good reason to refinance after a divorce. You might choose to dip into your home’s equity to give yourself a cash cushion as you navigate the first 6 – 12 months of financial independence, or you might be better served by using some of these funds to pay off high-interest credit cards
. Your circumstances will dictate the wisest use of these funds, so do consider your overall financial situation while you make this decision.
If your mortgage was first secured before 2008 and you haven’t refinanced recently, you stand a good chance of being able to lock down a lower mortgage payment. Interest rates are significantly lower than they were before the recession, even taking into account the spike in rates over the past few years.
When considering the overall trend toward higher interest rates, this is probably a good opportunity for you to exchange an adjustable-rate mortgage for a lower, fixed-rate mortgage. While the initial low cost of an ARM is appealing, the inherent uncertainty may not be the best option for you in the years to come. Consider the cash flow you can expect post-divorce, and calculate whether or not you could adapt to a higher interest rate if rates continue to climb for the next decade.
Although divorce is stressful at best and often utterly heartbreaking, it’s also an opportunity to take control of your finances
and position yourself for a healthy, fresh start. Take care of yourself throughout this process, and try to keep your emotions at bay while you are making these crucial decisions.
Properly tending to your post-divorce financial well-being will require you to be savvy, focused, and optimistic in the face of adversity. Taking the time to educate yourself on how your mortgage functions as the cornerstone of your financial security
will serve to empower you to use your mortgage to serve your own financial goals.