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 such as real estate. 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 may consider refinancing.

This article will explain how refinancing a house after divorce works and why you may want to choose this option.

Do You Have To Refinance Your House After A Divorce?

No, many divorcing couples may decide to sell the home if they can’t afford the mortgage payments after the divorce agreement. But if you or your ex-spouse want to keep the home, a refinance might be the best method of removing a borrower’s name from the mortgage loan.

There may also be additional benefits of refinancing after a divorce settlement. Up next, let’s take a look at some reasons why some homeowners may choose to refinance.

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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 The Mortgage

Refinancing 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. When you take out a new mortgage with a refinance, you can remove your ex-spouse from the loan and title.

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 Remove Your Name From The Mortgage

On the other hand, if you’re not keeping the home but your former spouse is, a refinance can help free you from the previous loan. As long as your name is on the mortgage, you’ll be responsible for making the monthly payment, even if you’re not living there.

By going through the refinance process, you can remove your liability. If your spouse misses payments in the future or even goes through a foreclosure, it won’t be reflected in your credit report.

To Change The Mortgage Terms

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

You can also use a refinance to change the type of mortgage you have. For example, if you currently have an adjustable-rate mortgage (ARM) but would like to have a fixed-rate loan, you can use a rate-and-term refinance to replace your existing form of financing.

To Access Your Home Equity

You can also do a cash-out refinance to access the equity in your home. Equity is essentially the difference between your current mortgage balance and what your home is worth. By refinancing your existing loan, you can convert some of your equity into cash to be used for a multitude of reasons.

For example, 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 deed or warranty deed to remove their name from the title.

How To Refinance Your House After Divorce

The process of applying for a refinance is fairly straight-forward. You’ll start by filling out the application and getting preapproved by a lender. During the underwriting stage, 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 or child support to your former spouse, the lender will view these payments as a debt obligation. Or, any income you’re receiving in the form of alimony must meet the lender’s requirements if you 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. But, once your lender approves you for the refinance, the property will be appraised. From there, you’ll move toward closing on your new loan.

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. You must also be current on your mortgage payments. 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.

Co-Own The Home

If you can’t afford to refinance, or if both you and your ex-spouse want to keep the marital home, you could choose to co-own the house. While this option is less common, some former couples may keep the home while both covering their share of the mortgage payment. If you choose this option, consider making it official in your divorce decree or signing a separate contract.

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. 

Jamie Johnson

Jamie Johnson is a Kansas City-based freelance writer who writes about a variety of personal finance topics, including loans, building credit, and paying down debt. She currently writes for clients like the U.S. Chamber of Commerce, Business Insider and Bankrate.

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