Should Homeowners Refinance Their Home During a Divorce?
When you’re experiencing a divorce, the road ahead can feel never-ending. But rest assured that there is a light at the end of the tunnel, and your support system is here to provide guidance and reassurance along the way.
As you move through the process of dividing assets, the family home is likely at the top of the list. To help you navigate your options, we’ve outlined how homeownership is handled during the process of divorce and what you need to know about refinancing your mortgage as an individual borrower.
How Is Homeownership Handled During Divorce?
Around 53% of couples who divorced in 2022 were homeowners.1 If you and your spouse purchased a home during marriage, you now must decide how to handle the home during the divorce.
There are three possible routes couples can pursue to split property:
1. Sell the house
If neither you nor your spouse would like to remain in the family home, you may choose to sell the house. This decision could also be the result of the divorce agreement’s division of assets. When the family home is sold, the profits from the sale are divided between both parties.
Of course, selling a home isn’t cheap—which can pose a challenge when you’re already financially strained during the process of divorce. If that’s the route you decide to take, keep in mind that you’ll need to pay for home repairs before listing the property, real estate agent commissions, and taxes. Some of these costs may need to be factored into the divorce agreement or settled on between you and your ex-spouse ahead of time.
2. Pay out the equity
Say you and your ex-spouse have a joint mortgage on the property, and you’d like to continue living in the home. You may be able to buy out your ex-spouse’s share of the house by paying them half of the home’s current equity. Here’s how that would look:
For example, if your home is worth $500,000 and your mortgage has $100,000 remaining, your home has accrued $400,000 in equity. To buy out your ex-spouse’s share, you would need to pay them $200,000—assuming the divorce agreement is 50/50.
3. Refinance
If you choose to pay out the equity of your home to your ex-spouse, it’s likely you’ll need to refinance the mortgage.
You and your ex-spouse can refinance your joint mortgage into a new mortgage using only one of your names (whoever chooses to continue living in the house). By refinancing the mortgage, your ex-spouse’s name comes off the mortgage and they are no longer responsible for making payments.
Two Types of Refinancing
If you’re looking to pay out half of your home’s equity to your ex-spouse (as we discussed in option #2) but don’t have the cash on hand to do so, a cash-out refinance is a viable option.
A cash-out refinance allows homeowners to refinance their mortgage for more than the outstanding balance—converting home equity into cash while removing the other spouse from the existing mortgage.
Another option is a rate and term refinance, which would allow you to update certain aspects of your existing mortgage including the interest rate, term length, and listed borrowers. If you don’t need to borrow to buy out your spouse’s portion of the home’s equity, rate and term refinancing tends to offer better interest rates than a cash-out refinance.
An Alternative to Refinancing: Release of Liability
You may be able to obtain a release of liability document from your mortgage lender, though these are rare. This document releases your ex-spouse from their responsibilities as a borrower and indicates the lender’s faith in your ability to continue making payments as a single borrower.
To obtain a release of liability, you would need to complete a qualification process similar to the process borrowers go through when obtaining a new mortgage. This process is to confirm that you can still pay the mortgage on your own.
Because lenders do not offer a release of liability document often, refinancing the mortgage is a more common option for couples during divorce.
Remember to Update the Property Title
A word of caution: Even if you removed your ex-spouse from the mortgage, you still must remove them from the property title. Otherwise, they could be entitled to profits if you sold the home or may be able to borrow against the home’s equity.
You can update your home’s title through a quitclaim deed, which is a legal document used to remove the name of your ex-spouse from the title (transferring property ownership from one party to another).
Experiencing Divorce? We’re Here for You
Divorce is a life event no one looks forward to, but having the right team of compassionate professionals on your side can make the process much more manageable. If you’re currently in the process of divorce, preparing to file, or navigating your new normal, we can help. We are an all-woman team dedicated to empowering independent women to achieve financial confidence and freedom. We welcome you to reach out anytime, and we look forward to speaking with you soon.
