There can be any number of reasons to refinance your mortgage after a divorce, but many people do so mainly to take their former spouse’s name off of the loan and have it put into one single name. These circumstances come with their own special requirements and outcomes.
In divorce proceedings, assets are often split 50-50, though they may be split at a different predetermined ratio. When it comes to assets like bank accounts and investments, dividing is easy. However, while a home’s equity can be considered a splittable asset, the home itself cannot be split unless it is sold.
This is where things tend to get sticky: who gets the house, and once that’s decided, what is the next step?
Removing A Former Spouse’s Name From Your Mortgage
The next step should definitely be getting the other party’s name off of the mortgage. As with any debt accrued during a marriage, a divorce decree does not supercede the existing repayment terms, even if it stipulates who is responsible for what debt. Changing the mortgage from one name to two is the best way to protect both parties in this situation.
There is more than one way to get a former spouse’s name off of a loan. In some cases, the mortgage is assumable, meaning that one party can assume the existing terms, rate, and payments with their current income. In this instance, the responsible party would simply take over sole responsibility of the mortgage.
In other cases, one of the parties is not an ideal borrower on their own (bad credit, low income, etc.) and it’s safer for both parties for them to sign a release of liability. It is fairly rare for a mortgage carrier to grant a release of liability, and the party remaining on the loan will have to prove that they can take care of the mortgage on their own.
Besides these two options, selling the home or paying it off are the only other ways to get an individual’s name off of the mortgage without a refinance of some sort. A refinance after a divorce will automatically remove the other party’s name from the loan, and in cases that don’t involve an actual legal divorce, the removal of the name can always be written into the terms of the new loan.
Additional Benefits Of Refinancing After A Divorce
Refinancing a home after a divorce can provide more benefits than just placing it into the sole owner’s name. It will give the new proprietor many more options in terms of interest rate, pay schedule, and loan term, and might also provide cash-out equity.
Given that finances are often a top priority (and possibly a major source of conflict) in a divorce, a refinance can help absolve many issues. First off, it can lower the monthly mortgage payment, which is often the only way that one party can hold on to the loan after going from two to one incomes. If the mortgage was initially unassumable after divorce proceedings, a refinance may change the rate and terms enough that it can then be taken over by one party.
Refinancing can also help pay off debts that might have accrued before, during, or after divorce proceedings. If you and your partner racked up a lot of debt during your time together, it makes sense to try and pay off as much of it as possible instead of splitting it up like you would assets. This can be tough, however, especially since divorces are expensive and often leave both parties relying on a drastically lower income than they had prior to the split.
Financial strain may make it difficult for one of the parties to hold up their end of the debt, and some situations may leave one divorcee seriously questioning whether the other will even bother to keep up their end of the deal. If either of those is the case, eliminating as much debt as possible as soon as possible is the best way to protect yourself, and a refinance may be the quickest way to do it. That being said, this option only makes sense if you have a lot of equity in the home. Otherwise, your efforts are likely to leave you with little more than a lower monthly payment and enough cash to cover the closing costs.
A Few Things To Keep In Mind
If you are refinancing after a divorce, you will have to be able to prove that you can make the payments and meet the terms of the loan. Even with the prospects of a lower interest rate, a lower loan balance, and a lower monthly payment, you still may not qualify for the refinance, so be prepared with a backup plan if you are not approved.
If you do refinance after a divorce, especially for the purposes of removing a party’s name, you will need additional documents above what is already required for a refinance. This will include your divorce decree, any legal agreements or contracts that were signed regarding finances and assets, and joint as well as newly single bank statements.
Lastly, take the time to make sure that everyone is getting a fair deal, even if it means selling the home and splitting the revenue. While divorce is often a time when emotions are running high, it is definitely not the time to make any snap decisions or take any hasty actions that you may regret in the future.