Refinancing After Divorce: Everything You Need To Know

There are many things you need to think about after a divorce, including how you’ll split your assets. This can quickly get complicated, especially if you and your former spouse share a mortgage.

Some couples choose to sell the home after a divorce and split the proceeds. But if one of you wants to keep the house, you might consider refinancing. This article will explain how refinancing after divorce works and why you may want to choose this option.

Why Should You Refinance After A Divorce?

Refinancing your home after a divorce can be a good option and help you and your former spouse meet your financial goals. Here are a few reasons you may want to refinance your mortgage after a divorce.

To Remove An Ex-Spouse From A Mortgage

Refinancing your mortgage can help remove your former spouse’s name from the home loan. Your current mortgage was taken out in both of your names, so you both share an equal interest in the property.

You’ll take out a new loan in your name when you refinance. You can also ask your lender for a release of liability, which removes your ex-spouse’s financial obligation to repay the loan if you default.

Removing your ex-spouse from the mortgage doesn’t just benefit you. It can help them as well. Removing that person from the mortgage gives them an opportunity to purchase a new house post-divorce.

To Change The Mortgage Terms

Refinancing after a divorce can help you get a home loan with more favorable mortgage terms. For instance, you may want to take advantage of low interest rates, pay off the mortgage sooner, or make your mortgage payments more affordable.

To Access Your Home Equity

You can also do a cash-out refinance to access the equity in your home. You can use the equity to pay off your former spouse’s share of the house. Or you could use these funds yourself to pay down debt or fund a home improvement project.

Considerations For Refinancing Your Home After Divorce

You and your ex-spouse will need to consider a few factors when looking to refinance your mortgage. For instance, you need to decide who will continue to live on the property and who will be removed from the mortgage.

You also need to consider whose name is on the home’s title. The house title states who has ownership rights over that property. You can use a quitclaim or warranty deed to remove their name from the title.

How To Refinance Your House After Divorce

The process of applying to refinance is similar to applying for a mortgage. You’ll start by filling out the application and getting preapproved by a lender. Your lender will verify your home equity, credit score, debt-to-income ratio (DTI) and income.

However, refinancing after a divorce may follow a different process than a standard mortgage refinance. For instance, if you have to pay alimony to your former spouse, the bank will view this as a debt obligation.

And it can be difficult if you’re receiving alimony and plan to use these funds to pay the mortgage. Your lender may require that you receive the alimony for six months before it can be considered income.

However, once your lender approves you for the refinance, the property will be appraised. From there, you’ll move toward closing on your refinance.

Alternatives To Mortgage Refinancing Following A Divorce

In some scenarios, refinancing after a divorce may not be possible. If you’re unsure whether refinancing is the best choice, here are some alternatives to consider.

Mortgage Assumption

A mortgage assumption allows you to take over the mortgage payments and release your former spouse from any financial liability. Of course, your lender has to sign off on this first and will check your credit score, DTI and income.

And you must be current on your mortgage payments. But if your lender agrees, an assumable mortgage may be a good alternative to refinancing after divorce.

Sell The Property

Selling the house is another alternative to refinancing after divorce, and it may be an easier option. By selling the home, both parties can split the proceeds of the sale and walk away free and clear. And you can use that money to purchase another house if you choose.

Wait To Refinance

Another option is to hold off on refinancing and pursue other avenues for removing the other spouse from the mortgage and title in the meantime. However, waiting to refinance does come with risks: interest rates could rise, or your home value could decrease.

The Bottom Line

Refinancing is an option if you recently went through a divorce and are trying to decide what to do with the family home. Refinancing after divorce isn’t easy, but it can be a good way to remove your former spouse from the mortgage. If you’re considering a mortgage refinance after divorce, you can fill out an application today.