The Crossroads of Divorce and Home Refinancing in the United States

Gustan Cho Associates News For The Week Ending Friday, June 30th, 2023, from Dustin Dumestre, Host of Friday’s Mortgage Minutes.

This week’s Gustan Cho Associates NEWS wrap-up update is from Dustin Dumestre, host and director of Friday’s Mortgage Minutes is The Crossroads of Divorce and Home Refinancing in the United States:

Divorce is an emotional experience, often requiring families to make critical decisions concerning shared assets, including the family home. For many families, the home represents the largest financial investment in their shared financial portfolio. Arguably, the most common question during a divorce at the negotiating table is how to split the home equitably. In this blog post, I will connect divorce and home refinancing. Hopefully, providing insight into how a cash-out refinance can help families find a fresh start after a divorce.

Common Options Concerning Marital Home

Families must navigate an equitable solution for all involved in the family home when they divorce. There are generally three options: selling the house (splitting net proceeds), keeping it jointly (rental income), or having one individual buy out the others share (cash-out refinance). If one individual decides to keep the home, a cash-out refinance becomes a crucial step to consider.

Cash-Out Refinance As a Solution

A cash-out refinance requires replacing an existing mortgage with a new loan, traditionally offering more favorable terms for the individual who keeps the home. This is why having a knowledgeable and experienced mortgage advisor helps both parties achieve an equitable result. In my experience, the children and their school district, friends, and extracurricular activities will dictate who will keep the home and who will use the net proceeds as a down payment on a new home nearby. The individual who wishes to keep the home after a divorce is likely the parent who will be the majority caretaker moving forward. The cash-out refinance can provide numerous benefits for both parties involved if navigated properly.

Note:

Not all divorces have children involved, but the majority of divorces I see where a home is involved do have important factors involving children.

Removing the Ex-Spouse From the Mortgage and Chain Of Title

A cash-out refinance allows the individual to remove their ex-spouse from the mortgage and title, eliminating any financial ties and responsibilities associated with the home. This provides a sense of independence and allows a fresh start for all involved.

Lowering Monthly Payments

Divorce often brings significant financial changes. Refinancing provides an opportunity to negotiate a lower interest rate (not the case currently), extend the loan term (a favorable option), or change the mortgage type (likely from FHA to Conventional), resulting in reduced monthly payments and improved financial stability for all involved.

Accessing Equity

Refinancing can also enable access to the equity accumulated in the home. This can be valuable for individuals who need funds to buy out their ex-spouse or cover other expenses associated with the divorce.

Considerations for refinancing

While a cash-out refinance can be attractive, it is important to consider certain factors.

Financial Stability

Lenders will evaluate the individual’s financial situation to assess the loan’s ATR (ability to repay). Divorce often affects credit scores and income; ensuring financial stability and demonstrating the ability to make mortgage payments is important. (This is another factor that can dictate which parent stays in the home.)

Ownership Transfer

If one individual buys out the other’s share, a legal transfer of ownership is necessary. This requires a mortgage advisor to work with attorneys from both sides to ensure proper documentation and compliance with state laws. A divorce decree and the divorce being discharged by the courts (signed by the ruling judge) will be required before the cash-out refinance is closed and funded.

Legal Agreements

It is critical to communicate with an attorney experienced in family law and real estate to draft a comprehensive agreement that outlines the terms of the cash-out refinance and ownership transfer. This protects both parties and minimizes future conflicts.

Once again… This is why having a knowledgeable and experienced mortgage advisor helps both parties achieve an equitable result. Divorce can be challenging but also presents an opportunity for new beginnings for all involved. Regarding your most important financial asset, your home, refinancing offers a way for families or individuals to secure their financial future and a fresh start. However, it is important to consider the financial stability, ownership transfer, and legal agreements before pursuing a cash-out refinance. Seeking an experienced mortgage advisor for professional guidance, along with attorneys and financial advisors specializing in divorce and real estate, can help individuals navigate this process successfully. In my professional experience, divorce is never fun; and can be the beginning of a new chapter for all involved.