The Rules of Refinancing During Your Divorce

If You’ve Been Wanting a Lower Mortgage Rate, Now May Be the Time to Act

If you are going through a divorce, one of your major considerations is what to do about the family home. The easiest solution is for both parties to agree to sell the home and divide the proceeds according to the rules of equitable distribution. But this is rarely feasible. Usually, at least one party wants to continue living in the home. If there are children, letting the custodial parent keep the home so the kids can keep living there is often the best choice, since it offers stability at a time when your children are going through a bit of turmoil. But when one person keeps the home, there are financial and legal pitfalls you need to know about.

Refinancing to Get a Lower Interest Rate

Anyone with a six or seven-figure home has to be sensitive to fluctuations in mortgage rates. Even a quarter of a percentage point could make a difference of tens of thousands of dollars over the life of your loan. Maybe you’ve been considering refinancing for years but haven’t gotten around to it. You’re headed towards divorce, which could mean significant belt-tightening. You know you could ease a bit of the financial tension with a refi at a lower rate.

If you refinance before either party files for divorce, you can still claim to be married, so you can claim your total household income on the application. You don’t have to tell the lender you plan on divorce. In fact, you don’t even have to tell your spouse. This makes the process very easy, but the result is that both of your names will be on the mortgage. You might have a better rate, but you haven’t used the refi process to clear up the legal obligation that could haunt you after your divorce is final.

How Leaving Your Name on the Mortgage Can Come Back to Haunt You

If both spouses’ names are on the mortgage, the lender has the right to come after either party for payment, regardless of the terms of divorce. For example, the marital settlement awards the house to Spouse A, who lives there with the children. Spouse B pays alimony and child support sufficient for mortgage payments and other living expenses. But Spouse A doesn’t make mortgage payments, and the mortgage falls into arrears. The lender can go after Spouse B, whose name is still on the mortgage.

To avoid this type of complication, the spouse who surrenders ownership interest in the home must get off the mortgage. You might be able to accomplish this through a loan assumption. This process allows you to take one party’s name off the loan without any other changes. This is ideal if you already have a low-interest rate you’d prefer to keep. Fees for a loan assumption are also generally lower than with a refinance.

Unfortunately, a lender might not let you out of your obligation, especially if you’ve been the primary breadwinner and your salary is the reason the mortgage was approved. In that case, you’ll need to refinance the home under one spouse’s name.

When to Refinance a Home to Remove Your Name From the Mortgage

If you want to kill two birds with one stone — get a better rate, and remove one spouse’s name from the mortgage — when is the best time to begin the process? Here are your choices:

  • Before filing for divorce — If the spouse who will retain the house has sufficient resources and income to qualify for the home loan, you can refinance in that person’s name only, using only that person’s financials. If that spouse will need alimony and child support payments to make payments, a lender is not likely to approve the loan.
  • During divorce — Couples who don’t think about the home until they’re already in the midst of divorce proceedings will find themselves in a bind. Again, a spouse who can afford the mortgage without assistance might be approved for a refi, while the one dependent on support will have to wait until after the divorce is final.
  • After the divorce — Couples often wait until the court approves their property settlement and issues support orders before trying to refinance. But even when the court has ordered support, a lender wants to know the obligor will pay. Lenders sometimes require six months or more of payments before they will count those funds as reliable income for a borrower.

No matter when you refinance, you must make sure that your divorce settlement protects whatever equity interest you have in the home and that you are properly compensated. Finally, after the refi goes through, the spouse who has been taken off the mortgage must also sign a quitclaim to be taken off the deed.

What Happens if I Can’t Refinance After Divorce?

If you can’t refinance the home for one reason or another, you need to protect yourself as much as possible in your divorce settlement. Strategies you might employ include:

  • Home buyout — In this scenario, the spouse retaining the home pays the other spouse their equity on the home. Let’s say the home is valued at $800K with $600K left on the mortgage. Each spouse holds $100K in equity and owes $300K on the mortgage. The spouse retaining the home would pay the other $100K and assume the total obligation. Often, assets from the marital estate are used to finance the buyout. The contract for the buyout affords the selling spouse some protection until his or her name can be taken off the mortgage.
  • Selling the home — The spouses sell the home and split the proceeds according to the rules of equitable distribution. The mortgage is no longer an issue.

Home issues can be very complicated, especially for high-net-worth couples with valuable real estate. You need experienced counsel to protect your rights and work towards a favorable resolution.


Karen Rosenthal

Karen B. Rosenthal is a partner and co-founder at matrimonial litigation firm Bikel Rosenthal & Schanfield LLP, where she brings 35 years of matrimonial law experience to bear in matters involving high-net-worth equitable distribution, contentious custody battles, and other high-stakes disputes. Certified as an Attorney for the Child and a frequent speaker on topics related to children going through high-conflict divorce, she has been recognized as a leading New York lawyer by Super Lawyers, Best Lawyers, Crain's New York Business magazine, and New York magazine.

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