Should you refinance before, during, or after a divorce? With nearly 700,000 couples separating every year in the United States — many of them homeowners — it’s a common and important question to ask.
Refinancing your mortgage before filing for divorce is no different than a regular refinance. This approach allows one spouse’s name to be removed from the mortgage, or for one or both parties to borrow home equity as cash to help split assets when they do file for divorce.
While it’s possible to refinance during or after a divorce, you’ll need to be prepared for some extra red tape.
- While refinancing before divorce usually is the easiest option, it’s possible to refinance during a divorce, or after finalizing your divorce.
- In many cases, the equity that’s taken out during a home refinance is used to buy out ownership from the partner who won’t be staying in the home.
- If it’s not the best time financially to refinance, you can explore other options, such as a mortgage assumption, or selling the home.
Why Refinance When Getting Divorced?
For divorcing couples, refinancing can clear the path to separation without dealing with lingering financial ties. With much of the legal process of divorce focused on splitting assets, settling ownership and financing for what is most couples’ biggest shared asset can help both parties avoid a potentially major and contentious obstacle.
In addition to helping untangle shared finances, refinancing a mortgage can help improve both parties’ financial standing as they move forward.
“After a divorce, refinancing your home can be a strategic move to divide property assets and financial obligations,” says Laura Wasser, a divorce attorney based in Los Angeles and chief of divorce evolution at Divorce.com. “This step can safeguard your credit by taking a spouse off the mortgage or help in acquiring a spouse’s portion of the home. Yet, it comes with its own set of hurdles. The individual retaining the home needs a robust credit score and sufficient income to secure the loan independently.”
Here are five reasons to refinance your mortgage when getting a divorce.
1. To remove your spouse from the mortgage
If you’re keeping the home after the divorce, refinancing lets you remove your spouse’s name from the mortgage. However, refinancing won’t automatically remove your spouse’s name from the deed. Talk to your lawyer about confirming that only you have a claim to the property.
2. To remove yourself from the mortgage
If you’ve agreed to let your spouse keep the home, it’s important to get your name off the mortgage as quickly as possible. You are responsible for the mortgage as long as your name is on the loan. That means if your ex-spouse misses any payments, it could harm your credit score.
3. To borrow equity to buy out your partner
If you’re keeping the home after the divorce, your settlement might require you to buy out your partner’s share of ownership in the property. You may be able to avoid paying that expense out of pocket if your home has equity you can borrow with a home equity line of credit, home equity loan, or cash-out refinance. Once you’ve used your share of the equity to buy out your partner’s share, you would assume all remaining debt on the home.
4. To buy a new home
If your fresh start involves buying a new home, you need to get your name off the shared mortgage as quickly as possible. As long as your name is on the shared mortgage, the monthly payment on that loan will count toward your debt-to-income ratio.
Mortgage lenders calculate your DTI ratio to gauge how much income you have free after paying your debts. Your DTI ratio will take a hit if you’re still listed as responsible for the shared mortgage, meaning you may struggle to get a mortgage for a new home. Refinancing to remove your name from the existing mortgage will reduce your DTI ratio and better reflect your financial situation going forward when you apply for a new home loan.
5. To access home equity
If your home’s property value has increased dramatically, there could be a good deal of cash available on the other side of a refinance. The spouse giving up the house also will be giving up the current and potential market value of the home, as well as their share of the home equity. A cash-out refinance can make available enough money to split the assets as needed, even if the home won’t be sold as part of the divorce settlement.
Refinancing Before a Divorce
Refinancing your mortgage before separating or filing for divorce is the easiest option. Since you are still legally married, no special conditions apply to the refinance, which makes it easier to remove one spouse from the loan. It also can make the divorce easier if you and your spouse decide how to split your assets, including your home, before initiating the legal process.
Pros and cons of refinancing before getting a divorce
Here’s a look at what to consider when timing your refinance around your divorce:
Advantages and Disadvantages of Refinancing Before Divorce
|Removing a current spouse from a mortgage is easier than removing a former spouse.||You may not know how assets will be allocated yet.|
|If interest rates are climbing, waiting to refinance after the divorce is settled could leave you with a higher rate.||If you refinance prematurely, it can cause legal complications with the settlement.|
|Getting an updated monthly mortgage payment can help you plan your post-divorce budget.||Getting divorced is stressful, and going through a refinance during a divorce may add stress to both parties.|
Refinancing During a Divorce
Refinancing a home during a separation or divorce is more complicated because of the legalities involved — especially if one partner is uncooperative. Once you report your separation to a mortgage lender, the lender can work with you only if you’re able to provide a written agreement as to how assets are being divided.
Also, if you have a low credit score or a lot of other liabilities, it may be more difficult to refinance at an affordable interest rate.
Pros and cons of refinancing during a divorce
Here’s what to consider when starting the refinancing process during your divorce:
Advantages and Disadvantages of Refinancing During Divorce
|You may be more emotionally ready to commit to refinancing.||You are obligated to report your updated marital status to your mortgage lender.|
|You may have decided already which spouse will retain ownership of the home.||Refinancing during separation can take several months.|
|You cannot finalize a refinance that’s been initiated during separation until you have a written agreement for asset division.|
|Interest rates could rise between the time you initiate refinancing and when you close on the new loan.|
Refinancing After a Divorce
Refinancing a shared mortgage after you’ve finalized a divorce is even more complicated.
Once an agreement has been reached regarding how much one party will pay in alimony, maintenance, or child support, a mortgage lender will include those payments in its DTI ratio calculation.
If the spouse keeping the home is making support payments, their post-divorce higher DTI ratio may make it more difficult to refinance, and they may have to pay a higher interest rate.
If the spouse receiving the support is keeping the home, the lender will consider the support payments as income, and include them in its DTI ratio calculations. Some lenders may require you to receive alimony or other support payments for six months before they will consider it as income in your DTI ratio.
If you can’t refinance after a divorce, you could ask your spouse for more time to refinance as part of the settlement. Under this type of agreement, one party can agree to make all mortgage payments on time until they improve their credit score or financial standing enough to refinance.
In other cases, one party may agree to sell some of the assets they receive in the divorce settlement to buy out their spouse’s equity. Additionally, one party may trade their interest in shared assets, such as retirement accounts, for the other partner’s home equity. Either option can improve your finances enough for a lender to approve your refinance application.
Finally, selling the home may be the most realistic option if you don’t expect you can refinance any time soon.
“If you delay refinancing until the divorce finalizes, you might face higher interest rates,” Wasser says. “If a refinance isn’t feasible for both parties, other options like selling the home or maintaining the current mortgage might be necessary, leaving both individuals accountable for the debt. Navigating this decision is intricate and necessitates legal advice tailored to the specific situation.”
Pros and cons of refinancing after a divorce
Here’s a glance at where refinancing after a divorce leaves you:
Advantages and Disadvantages of Refinancing After Divorce
|Support payments can count as income that actually benefits your DTI ratio during refinancing.||Support payments increase the DTI ratio for the person making payments. This could make it difficult to refinance with a good rate.|
|Both parties will have a clearer idea of their post-divorce budgets.||While a lender can count support payments to help your DTI ratio, it may require payments be made for six months before doing so.|
Alternatives to Refinancing While Getting a Divorce
Do you have to refinance after divorce? While refinancing is considered one of the quickest and easiest ways to split a property asset when divorcing, it’s not the only option. If you’ve used a mortgage refinance calculator and the results suggest you need other options, here are some alternatives for handling a shared home during a divorce.
When assuming a mortgage, one party agrees to take over all mortgage payments and financial responsibility for the home. To approve an assumption, a lender will verify that the person taking over the home has the income, DTI ratio, and credit score needed to get a mortgage on their own. Additionally, homeowners must be current with mortgage payments for lenders to consider this option.
Sell the home
If both parties would simply like to move on, selling the home may be an easier option that helps them to sever ties fully. In most cases, both parties agree to list the home by a certain date. Revenue from the sale is then split. Selling a home is sometimes preferred in cases where a home has accrued a good deal of equity, because both parties can use the proceeds to buy new homes.
Wait to refinance
If refinancing isn’t in the cards for you right now, refinancing after divorce may help you get more favorable terms. However, the party keeping the home will need to take steps to remove the other person from the mortgage and title to untangle them from liability. This move isn’t without risk.
While you may be holding out for lower interest rates, there’s no guarantee that rates will decline. Other factors may affect your home’s value — either up or down. If your home’s value declines, you will have less equity to benefit from when doing a cash-out refinance or borrowing your equity.
FAQ: Refinancing Before, During, or After a Divorce
Check out the answers to these frequently asked questions about refinancing around a divorce.
If you have a joint mortgage, in most cases the mortgage cannot be refinanced without consent from both owners. Your spouse will need to complete and sign the refinancing documents. If you’re using refinancing to remove your spouse from the mortgage, this can be done as long as your spouse provides consent. Attempting to refinance a joint mortgage without the other person’s knowledge and consent is considered mortgage fraud.
If you are the sole owner of a mortgage, even though your spouse lives in the home with you, you do not need your spouse’s consent to refinance.
No. You will need to meet all lending requirements as a solo borrower.
There are no laws limiting how often you can refinance your home. However, most lenders have waiting periods that last anywhere from six months to a year. You may be able to refinance sooner if you jump to a different lender. With a cash-out refinance, you’ll need to wait until you’ve built up enough equity to withdraw cash.
Plus, it costs money to refinance a mortgage, and you need to pay closing costs every time you refinance.
In most cases, spouses don’t pay capital gains taxes when a property is transferred as part of a divorce settlement. Some refinancing costs are tax deductible, but others — such as closing costs — are not.
The Bottom Line on Refinancing Before, During, or After a Divorce
Refinancing can be an important tool for helping divorcing spouses to separate assets without sacrificing any of the equity they’ve gained through property ownership. If one party intends to stay in the home, refinancing while you’re still married can help to create a clean split that allows the other party to be free from financial liability even before the divorce is finalized. Refinancing during or after divorce is more difficult. If you can’t refinance after divorce, you’ll need to work out an option with your former spouse.
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