The advantages and pitfalls of refinancing a mortgage due to divorce
What to do with the family home in a divorce is one of the most significant decisions most spouses must make in divorce negotiations. Are they parents who think it would be good at a time of family turmoil for the children to stay in the home they know? Does one of the spouses want to keep that residence as his or her home or to use as a rental property?
If not, the house is normally sold and the net proceeds divided.
Equitable distribution
The home — the largest asset in most marriages — is a valuable property to be divided in a divorce. Florida is an equitable distribution state, meaning that all marital property must be divided between divorcing spouses in a fair way, which is not necessarily an even split of everything down the middle. So, if the house is a marital asset, the equity the couple owns in it is likely a large part of the fair-property-division equation.
Mortgages and titles
If the couple wants one spouse to get the home, complications arise when there is a mortgage on the property. It would be unusual for a couple to keep the home and the mortgage in their joint names after a divorce. The spouse who will not live there likely wants the cash from his or her share of the equity in the home and does not want to be liable for payments on the mortgage.
The couple might be able to negotiate a settlement that would compensate that spouse for his or her equity in the home another way such as by reducing or eliminating a claim for alimony or awarding that spouse other assets like retirement accounts, stocks or other real estate. However, that spouse’s name would still be on the title documents and mortgage and most lenders will not just remove a party from an existing mortgage contract that is not being paid off.
Refinancing pros and cons
To remove the vacating spouse from the mortgage, the home would normally need to be refinanced and a new mortgage and supporting documents issued. That is also a way for the staying spouse to raise cash to pay the other for his or her equity in the home, if necessary, but pulling that equity out would mean a higher mortgage and payments.
The catch here is that the spouse who wants the home must qualify financially for the refinanced mortgage alone without the income and assets of the other spouse. The new owner would also have to have a satisfactory credit rating without the impact of the former spouse’s income and financial situation. Plus, the spouse keeping the home must be able to make the mortgage payments after the divorce, which depends of the levels of income, alimony and other assets.
Whatever arrangements divorcing parties are contemplating, it is important to talk to an attorney about tax ramifications as well as the pros and cons of refinancing before or after the divorce happens.
