Money in the Bank: Refinancing Tips for the Recently Separated
Deciding to separate is never an easy decision. Sometimes couples simply grow apart or take on new interests and career paths that lead them in different directions. Whatever the cause, it’s vital to keep mortgage payments going on your marital home, even if one person moves out.
Remember, banks don’t care about personal issues and will hold both parties on a mortgage liable for any missed payments. So when it comes to shared property, an option to consider during a separation is for one spouse to pay out the other and then refinance the home.
If you’re interested in refinancing your home during a separation, here’s what you need to consider.
Why you should refinance
Refinancing a mortgage can save you money, usually when the current mortgage interest rates are lower than your existing mortgage. To see how much money you might be able to shave off your current mortgage payments, crunch the numbers on an online refinance calculator. Even if your mortgage payment goes down only, say, $75 per month after refinancing, those savings will seriously add up over a 30-year loan.
Remember that careful planning and timing are crucial in a refinance.
“Think logically, not emotionally,” says Vickey Barron, a real estate broker with Compass. “If you plan to pull equity out to pay off one partner, the person responsible for the new housing payment needs to think through the financial picture, to be sure the new payment is doable on a single income.”
Be aware: If you refinance and can’t make the new payments, you could lose the house.
Refinance before filing for divorce
Refinancing before filing for divorce benefits both parties, by settling the housing issue early. Getting your ex-spouse to cooperate after a potentially sticky divorce can be challenging.
Emotions aside, refinancing early in the divorce process will benefit you, as applications require borrowers to list their marital status.
“For couples who have not yet filed, they can list themselves as married, and then go through the process of removing one spouse from the loan,” advises Shelby McDaniels, channel director for Corporate Home Lending at Chase.
However, note that you’ll need a quitclaim deed once the divorce is finalized, to remove the spouse from the title.
“But if the departing spouse is to remain on title, that is OK,” says Cohn. “They don’t have to be on the mortgage as a borrower. Instead, you can consider putting the title into a trust or an LLC for postmarriage co-ownership.”
Refinance after filing for divorce
Refinancing after filing for divorce can make for a more lengthy and challenging process. The divorcing couple will need to inform the mortgage lender of their split.
“The spouse planning to maintain full ownership of the property will need written consent from the other (who intends to be removed from the loan or bought out), detailing the agreement,” says McDaniels. “This process is typically finalized during the divorce proceedings, which can take time. A home lending adviser can proceed with reviewing a refinance application once the agreement is official.”
This step can significantly delay the process of refinancing. Lenders will need not only the written agreement but a complete breakdown of the financials of the spouse retaining the home.
Ready to refinance?
If you are ready to move ahead with a refinance after a separation, here are the top things to keep in mind:
Title: When changing or removing names on a title, make sure to understand the potential closing costs, such as transfer taxes or any monies owed to the departing spouse for their share of the equity, says Melissa Cohn, regional vice president and executive mortgage banker of William Raveis Mortgage.
Review debt-to-income ratio: According to McDaniels, the party planning to keep the home must ensure that they can afford the mortgage on the single income. If you are looking to refinance, make sure you can qualify for a loan based on your credit and equity before pursuing a new loan.
Prepare an emergency fund: Refinancing as a married couple is different from refinancing solo, and costs can add up.
“People refinancing don’t always consider the cost of running a house, i.e., property taxes and bills,” adds Barron. “Repairs and maintenance always come out of the blue and also need to be built into your financial plan.”
Work with a qualified home lending adviser: A suitable lender can help you land the best loan. You do not have to use your old lender unless it can provide you with a better offer.
“A home lending adviser can help you understand how much you can afford and whether you qualify, especially if you’re planning to refinance to become the sole owner of a property,” says McDaniels.
