Deciding to separate is never an easy decision. Sometimes couples simply break up or take on new interests and career paths that take them in different directions. Whatever the cause, it’s essential to maintain the mortgage payments on your marital home, even if someone moves out.
Remember that banks don’t care about personal issues and will hold both parties on a mortgage responsible for any missed payments. So wWhen it comes to shared ownership, one option to consider during a separation is for one spouse to pay the other and then refinance the home.
If you’re looking to refinance your home during a separation, here’s what to consider.
Why should you refinance
Refinancing a mortgage can save you money, usually when current mortgage interest rates are lower than your current mortgage. To see how much money you might be able to save on your current mortgage payments, work out the numbers on an online refinance calculator. Even if your mortgage payment only drops by, say, $75 a month after refinancing, those savings will add up seriously on a 30-year loan.
Remember that careful planning and timing are crucial in a refinance.
“Think logically, not emotionally,” says Vicky Baron, a real estate broker with Compass. “If you’re considering withdrawing equity to pay off a partner, the person responsible for the new housing payment needs to think about the financial situation, to make sure the new payment is doable on one 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 solving the housing problem sooner. Getting your ex to cooperate after a potentially tricky divorce can be difficult.
Emotions aside, refinancing early in the divorce process will benefit you, as applications require borrowers to state their marital status.
“For couples who haven’t filed yet, they can declare themselves married and then go through the process of removing a spouse from the loan,” advises Shelby McDaniels, Channel Director for Corporate Home Lending at Chase.
However, note that you will need a Quitclaim Deed once the divorce is finalized, to remove the spouse from title.
“But if the departing spouse has to stay on the title, that’s OK,” Cohn says. “They don’t have to be on the mortgage as a borrower. Instead, you can consider putting the title in a trust or LLC for joint ownership after marriage.
Refinance after filing for divorce
Refinancing after filing for divorce can make the process longer and more difficult. The divorcing couple will need to notify the mortgage lender of their separation.
“The spouse who plans to retain full ownership of the property will need the written consent of the other (who intends to be taken out of the loan or redeemed), detailing the agreement,” says McDaniels. “This process is usually finalized during the divorce proceedings, which can take time. A mortgage advisor can review a refinance application once the official agreement has been obtained.
This step can significantly delay the refinancing process. Lenders will need not only the written agreement, but also a full breakdown of the finances of the spouse keeping the home.
Ready to refinance?
If you’re ready to move forward with refinancing after a separation, here are the main things to keep in mind:
Title: When changing or deleting names on a title, be sure to understand potential closing costs, such as transfer taxes or any money owed to the outgoing 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 pay 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 applying for a new loan.
Prepare an emergency fund: Refinancing as a married couple is different from refinancing solo, and the costs can add up.
“People who refinance don’t always consider the cost of running a home, ie property taxes and utility bills,” adds Barron. “Repairs and maintenance always happen unexpectedly and should also be built into your financial plan.”
Work with a qualified mortgage advisor: A suitable lender can help you get the best loan. You don’t have to use your old lender unless they can offer you a better deal.
“A mortgage counselor can help you understand how much you can afford and if you qualify, especially if you’re considering refinancing to become the sole owner of a property,” McDaniels says.