People who are thinking about going through a divorce or in the midst of the process, sometimes jump at the opportunity to refinance their home. They say to themselves they want to get their spouse off of the mortgage. In context to a divorce, is this a good move or not?
To answer this question let’s talk about what happens when you refinance your home. The main reasons to refinance your mortgage (outside of a divorce context) is to either lower the monthly payment or payoff your mortgage faster so you can own 100% of the equity in your home. Some foundational questions to think about — before you start thinking about the impact of refinancing on your divorce process — are:
- Is the principal balance under the new mortgage less than the principal balance under the old mortgage at the same points in time over the life of the loan? Take a peak at the amortization schedule to answer this question.
- How much interest will you pay over the life of the new mortgage compared to the old one Again, a good reference is the amortization schedule to answer this question.
- How much collateral is needed to secure the new mortgage compared to the old one? In other words, if the property value went down does the new mortgage require more collateral to secure it. Usually not an issue if you have a lot of equity in your home and home prices are heading north.
- When will you recoup your closing costs?
- Do you have a fixed or variable rate of interest associated to the new mortgage? Variable rates of interest potentially come with more risk than fixed rates. Naturally, it depends where the market moves.
In context to a divorce, some questions to think about are:
- Will you or will you not own 100% of the liability after the refinancing? Or will you share it with your spouse? If you will share it then unless the factors outlined above prove economically viable should you refinance at this point in time?
- Is the home cross collateralized with another property whereby you have to free up the collateral for purposes of the divorce? If yes, then you may have to move through the refinancing process regardless of the factors outlined above to simply free up the title.
- If you have a variable interest rate, does the marital estate assume the liability for future interest payments which may be unknown?
- If you refinance your home and pay points or closing costs, who is responsible for the points? What is the impact on the division of assets if you paid them directly or potentially folded them into the loan itself? If you paid for the points out of marital property do you owe the money back to the marital estate?
- What if you do not obtain a benefit on your tax return for the points you paid? Who gets the carryover for the amortization of the points as a future deduction?
- Are there co-signors on the new mortgage that may have assumed additional liability as a result of the divorce? In other words, if your spouse was on the hook for the old mortgage but you move through a refinancing process, will any co-signor now have a different obligation than before you refinanced?
- What will happen to your credit if you refinance and no longer have your spouse as an income source?
Refinancing a home can present a lot of risk or opportunity. You need to know how to identify the risk to manage it. Be careful in these processes. It is not uncommon for people to not realize the intended benefits from a refinancing in context to a normal refinancing and even more so in context to a divorce.
About the Author
Larry Smith is a Founding Partner of Divorce Outcomes, a specialized professional services firm that manages all of the financial aspects in a divorce process. Since 2003 he has worked as a trusted financial advisor, financial advocate, divorce architect and technical financial expert; he is not an attorney. He is an alumni of KPMG and Andersen with expertise in technical accounting, forensics, sophisticated taxation, management consulting, risk management, advanced process engineering, business combinations, divorce management, multi-party negotiations, advanced quality analytics and cognitive performance technologies. Since 1986 Larry has been advising individuals and organizations about innovative financial solutions to resolve complex financial challenges that arise in life and in business.
For both personal and business divorces, Larry is considered an expert in divorce strategies, divorce process management, financial divorce architecture, financial risk management, taxation for divorces, financial divorce forensics, advanced divorce analytics, financial divorce negotiations and mediation, business valuations and sophisticated equity structures. He helps clients shape complex financial decisions, manage communication risks and ever-changing negotiating positions to strategically preserve or grow wealth from these types of transactions.
If You Have a Question
If you have a question, feel free to contact me at [email protected] or 617-680-5222. The call is free. I will spend 30–60 minutes with you. I will provide you an honest assessment as to where I think you are positioned in your divorce process or answer any questions you have. I may provide you some guidance, insight or advice that you can take with you as you wish. There is no obligation to move forward. The phone call is designed to ease your fears, provide you some options to pursue and a potential road to run on that can lead you down a path to achieve a successful outcome.
About Divorce Outcomes
Divorce Outcomes is a specialty services firm that helps people both domestically and internationally manage all of the financial decisions that arise in their divorce process. We are not attorneys. We are financial experts who partner with our clients as their personal financial advocates. We help our clients manage their divorce process, uncover hidden financial risks, architect divorce solutions, manage ever-changing negotiating positions, communicate complex financial matters and close the divorce process as soon as possible with a goal to arrive at the best outcomes possible. Throughout the process we evaluate the current state of our clients’ financial lives with an objective to best reposition their future. We do not sell any products. We simply raise issues that are in our clients best interest. Our clients share with us we:
- unfold, analyze and repackage their financial life so they are well positioned after their divorce
- preserve the value of their business or marital estate
- continuously strive to provide a return on our services
- build balanced financial solutions grounded in evidence
- find ways to make our client, and at times both parties, money through the process
- design their divorce to work for them and their family’s life
- provide mental clarity to make decisions
- reduce the total process time from start to close
- minimize the stress and unpleasant memories that can last a lifetime
As we reach an agreed upon settlement structure, we help our clients identify a fitting attorney who can leverage the financial solution to draft and record the requisite legal documents. Where outcomes are at risk from a traditional process, we function as expert financial negotiators or financial mediators to turn around the situation and achieve our client’s desired outcomes.
This communication is for general informational purposes only which may or may not reflect the most current developments. It is not intended to constitute formal advice or a recommended course of action as every person’s situation is unique and different. The information here is not intended to be, and should not be, relied upon by the recipient to make a decision without professional guidance.