Divorce Mortgage Options

Bill Gaffney
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Refinancing because of Divorce is the most common way for one party to keep the home and remove the 2nd party from title.

That said, it can get complex, and there are a few important factors to know, and we have a few tips.

Complicating all of this is that lifestyle expenses increase when people divorce. You’ve been sharing a space, and sharing household expenses in many cases, and splitting this means the two people go from one house to two houses, which of course will be more expensive.

Alimony payments will vary by state law in which you divorce; in CA it’s a mathematical equation based on monthly income for 1/2 the length of the marriage, unless one has been married for 10 yrs or more, in which case alimony payments are for life. Naturally, all this can be pre-empted by a pre-nuptial agreement if that was signed prior to marriage.

None of this here is legal advice; please note I’m a financial expert but for legal advice, please discuss with duly licensed legal counsel.

Option 1: Regular new Mortgage Divorce Refinancing

Example:

  • Home Value: $1,000,000.
  • Existing Current Mortgage Amount: $500,000 (50% of total value).
  • Parties are ordered or agree to split assets 50-50.
  • Party A wishes to keep the house and Party B will take the cash and move.

Party A gets a new mortgage for $750,000, which includes the old mortgage amount ($500k) + cash value of the current equity ($250k).

Party B walks away with $250k, but also loses any future equity growth in the property, and also has the hassle of moving, which always carries some emotions. That said, they also get a clean slate for a fresh new start.

The above is simple in concept, and if party A can afford it, then all is well – contact us, and we’ll set it up for you.

The problem: The one who wants to keep the home is often not the “primary breadwinner” who can actually afford the new higher house payment.

Option 1.1: A new 2nd Mortgage or Home Equity Line for Divorce

This is really option 1.5, because it’s essentially the same as the above: Get a new higher loan amount to pay out the moving party. This reduces the expenses related to refinancing, however, 2nd mortgages are harder to get and always a much higher interest rate.

Complicating this further is children. If there are children involved, one option that minimizes the impact to children is actually to keep the kids in place in the home, and the two parents swap in and out and make other living arrangements. The kids stay in the house, and if this is an option even for a few months or years, this can ease the transition for the children and reduce the psychological impact to them. This also means the requirements for each spouse can be minimal, since it’s just for them.

Option 1.2: A Reverse Mortgage to pay off the moving party

This isn’t common, but if the staying party is over age 62, and wishes to pay the moving party, one option that is especially good for cash flow is to obtain a reverse mortgage, which carries no house payment, to pay off the moving spouse.

A reverse mortgage is just a tool – the exact same as a regular mortgage, except house payments you’re not making get stuck on to the balance. You won’t “lose your house” except if you do things that would cause a foreclosure in same way as a forward-mortgage: stop paying homeowner’s insurance or real estate taxes for example (which could cause the bank to lose their security deposit – the home).

Upside to this option: Zero house payments, so cash flow doesn’t change if the house is paid off.

Option 2: Sell & Both Move

This is rarely anyone’s first choice, however, it’s a common option. Sometimes the negative emotions of the divorce color the house, and making a clean break and fresh start for all involved can be refreshing, and this is a chance for each respective spouse to create a new life in the style they want with the amenities to reflect their new lifestyle. Divorce is always painful, and simply selling the home can simplify things: the cash proceeds are split as per judge’s orders or mutual agreement.

Option 3: Equity Agreement

A 4th option is creation of fixed debt or a “JV (Joint Venture)” agreement wherein the moving party gets either…

  • A debt – fixed amount of money, secured by the property, and if they don’t pay, you/one/they could legally foreclose. Note this loan could also carry a “balloon” (payoff date, i.e. 5 years) and/or monthly payments (good for cash flow).
  • A % of the sale proceeds / value on some future date. This is often preferred if the property value is expected to increase and the moving party doesn’t need the cash right away or monthly payments, but instead sees the property as an investment.

We can help on a consulting basis, create the legal paperwork to protect the interest of the moving party, using the same type of system that banks use to protect their own interests (i.e. as a lien on the property, which would prevent party A from getting another loan to pre-empt the equity of party B). Party A may make payments on this loan if structured as such.

This is of course never preferred, but may be an option to legally protect the party that moves out when the staying party cannot afford the new higher mortgage and/or cannot obtain a 2nd mortgage sufficient to pay them off.

A mix of these can also be set up i.e. if party A (remaining in home) obtained a home equity line for $50,000 to pay party B (the moving party) $50k cash, and then the other $200,000 would be recorded onto the title of the property (as $200,000 in debt, or 20% of the future sale price of the property). This lien would stay in place until party A either…

1. Sells the home 2. Pays it off via cash by making payments. 3. Refinances the home and is able to pay it off via sale proceeds 4. Passes away, in which case the property passes on with the lien attached; a clause will make this then due, and if not paid, foreclosure proceedings would begin to force a sale and thus payoff.

Option 3.1: Equity Agreement with Investor

We have access to investors (high net worth individuals, hedge funds, etc.) that will buy a % of one’s home, so if the moving party wants cash now, and the staying party would prefer to give up a % of the future value of the property instead of refinancing (or isn’t able to qualify for refinancing and wants to stay), this can be a great option.

And now to you:

Get a free consultation – 100% confidential and no obligation. This will just be a solid sketch of real numbers based on your real situation.

We need to know:

  • How you will split up the assets… 50/50 is most common.
  • Do you want to stay? move? Either?
  • House value and any mortgage balances if known

Let’s chat. Utmost of discretion and privacy will be maintained during the consultation period. Note to proceed beyond a certain stage will require signature of both parties or a court order, if both of you are on title to the home.

Get Some Options.  Call me @ 800-216-6322

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