After Divorce: Should I Refinance my Home?

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:

  1. Find out the home’s current value.
  2. Subtract your outstanding mortgage balance from this number.
  3. 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.

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Divorce and Your Mortgage: The Dirty Little Secret

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No one goes into a marriage hoping to get divorced one day. Unfortunately, many married couples just don’t make it ’til death does them part’ – rather, they end up parting ways, and all of their assets have to get divorced, too.

When any couple decides to divorce, part of the process involves negotiating what is called a Property Settlement Agreement – often referred to simply as the PSA. This agreement can be set up by the divorcing parties themselves if they agree on everything to be divided. Parties who do not see eye to eye draw up their PSA through their respective divorce attorneys. Regardless of how it was generated, all Property Settlement Agreements must be approved by the court in order to be considered enforceable.

During the course of a divorce, emotions typically run high, and for many couples, getting through the negotiations of “who gets what” can be trying. Thus, many people rush through the PSA negotiations, signing off on the agreement without fully understanding what it entails.

There are many portions of the Property Settlement Agreement that will be cut and dry, easy to understand, and without complications. The PSA essentially lays out what property (both marital and separate) shall be distributed to which party. To be clear: marital property includes anything that was purchased by either spouse during the course of the marriage. These assets may have been bought by one spouse or both spouses together. Separate property would have been purchased by one of the parties prior to getting married.

One of the main items for consideration in a divorce is the marital home. If the home is not sold and its equity divided, its ownership will be granted to one party or the other. The spouse receiving the house then takes over the mortgage payments on his or her own, and, according to the PSA, is the sole owner of the home. This is one portion of the Property Settlement Agreement that is fraught with misunderstanding.

Unfortunately, your mortgage company was not privy to, nor does it care one iota about, your divorce agreement. Lenders only care about who was originally approved and signed for the loan. With married couples, this often means that the lender considered the income of both parties when approving them for a home loan. What that also means, is that both parties will remain liable for the loan – whether they remain married or not.

Subsequent to a divorce, the party who was granted ownership of the marital home may wish to refinance the mortgage. Upon making inquiries about doing so, s/he will then realize that both parties’ names are still on the mortgage, and that making any changes to the loan will in fact require the cooperation of both people. As you can imagine, this discovery is quite distressing to divorced couples who believed they had officially ‘moved on’ from the marriage.

Many people who find themselves in this position want to simply remove their ex-spouse’s name from the mortgage, however, lenders are not keen on this idea. Although it seemed you were granted sole possession of the home in your divorce agreement, your lender is not controlled by divorce court. When they granted you the loan, they took both of your incomes and credit histories into account in order to be sure that the loan would be repaid. From their point of view, it wouldn’t be prudent to simply excuse one of you from the terms that you agreed to when you first bought your home.

Although you may have thrown your hands in the air wondering what you can possibly do to finally and completely separate yourself from your former spouse – there are solutions to this problem. Although they are not simple, there are ways around this ‘dirty little secret’ that everyone failed to mention at the time of your PSA negotiation.

In order to essentially ‘remove’ your ex-spouse’s name from the mortgage, you will have to completely refinance your loan. This will result in a completely new mortgage with only your name on it. In order to refinance in this manner, you’ll have to be able to qualify for the loan on your own – so your income, credit score and financial history will all be reviewed by the mortgage company.

If you’ve found yourself in a similar situation and aren’t sure if you’d be approved to assume the mortgage on your own, work with an experienced attorney who knows mortgage refinance like the back of his hand. To find out if you would qualify for a mortgage refinance, or if you have other real estate questions after your divorce, send Veitengruber Law a message today. We offer free initial consultations. Please utilize all of the free information available to you through our law blog, and follow us on Facebook for regular legal tips and financial advice.

 Image credit: Derek Finch

Loan Modification vs Mortgage Refinancing: What’s the Difference?

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Contrary to popular belief, comparing loan modifications and mortgage refinancing is like comparing apples and oranges. Although they both have the potential to be very, very good for you – many of their attributes are actually quite different.

If foreclosure feels imminent, or if you are just beginning to really struggle to make your monthly mortgage payment, it’s important to know your options. Foreclosure is absolutely not your only option.

Loan Modifications

If you have sought the help of an experienced loan modification attorney – congratulations! You’ve taken the first step toward making changes to your existing mortgage so that it once again becomes manageable. Although you can apply for a loan modification on your own, it is not advisable. Your NJ loan modification attorney will negotiate with your lender on your behalf.

Along with your attorney’s help, you’ll apply for a loan modification with your current mortgage lender or bank. Your lender will then review your application, and may negotiate with your attorney about which changes to your loan would make the most sense. Some common changes often made during loan modifications include: extending the length of the loan, lowering the principal amount due, one-time forgiveness of late fees, and possibly lowering the interest rate on the loan.

If approved, your loan modification will be awarded to you on a trial basis first. The trial period typically lasts for three to six months. Making all of your modified payments on time during your trial period is crucial, and if you succeed, the modifications will become permanent changes to your home loan.

Mortgage Refinancing

In contrast to loan modifications, refinancing your mortgage will result in a completely new loan. Your old mortgage will be null and void, and a new one will be generated in its place, with the goal of giving you a new, lower interest rate so that your monthly payments are much more manageable. Qualifying for a mortgage refinance means your credit will be checked again, as will your current income. You will essentially be applying for a loan all over again. If your credit score or job status has changed (for the worse) since you first applied for your original mortgage loan, your mortgage refinance application may be denied.

It is also important to note that you will have to pay origination fees and closing costs if your refinance goes through. You will need to have a home appraisal completed, and real estate market conditions will be rechecked to determine whether you should be awarded a lower interest rate in the current market.

As you can see, both a loan modification and a mortgage refinance have the end goal of making your monthly payments achievable so that you can stay in your home. To find out more about either process, or if your lender has already started foreclosure proceedings, send us a message today. Your first consultation is always free so that you can determine if our services are what you need.

Image credit: Frankieleon