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How to divorce your mortgage

A house is often a major point a contention when a married couple decides to divorce. But whereas spouses once fought mainly over who would own the house (the name on the title), some experts say arguments today are more likely to zero in on who will be responsible for the mortgage (the person who actually pays it).

"We see more and more nowadays that if the mortgage exceeds the value of the property, neither spouse wants that obligation," says Carl Palatnik, a principal at the Center for Divorce and Finance, a financial planning firm in Melville, N.Y. "It's a very difficult issue."

Refinancing is less risky

If you're keeping the house, the best way to deal with the mortgage is usually for one spouse to refinance, Palatnik says.

"Maintaining that mortgage post-divorce is something to be avoided," he warns, "because you're financially connected to someone you don't like or don't get along with, and there are risks associated with that."

The biggest risk is that the lender will continue to consider both spouses jointly and individually responsible for the payments. That means a late or missed payment will affect both spouses' credit, regardless of any agreement between them to the contrary.

"It's virtually impossible for one spouse to take over the mortgage and take the other person's name off," Palatnik explains. "The lender has a better shot at collecting if both parties are on the hook for that money."

Another risk is that the spouse who moves out might not be able to purchase another residence. That's because the existing mortgage will "overhang that whole process and complicate the loan application," says Lili Vasileff, president of Divorce and Money Matters, a financial counseling firm in Greenwich, Conn.

But Vasileff also says refinancing can create a risk if one spouse lives in the house and the other refinances the mortgage.

"If they miss the payment, you're in trouble because the lender, by law, is not obligated to talk with you. That's a big danger," she says.

New loan can be challenging

The goal of refinancing is complicated by the current lending climate, since a spouse who's willing to refinance might not be able to do so. Poor credit, inadequate income and negative equity are examples of issues that can make refinancing difficult or impossible.

Possible solutions might include:

  • Shopping around for a more flexible loan product
  • The federal government's Home Affordable Refinance Program (HARP), which allows homeowners to refinance with negative equity
  • A co-signer
  • A one-year waiting period during which alimony payments can be documented for income qualification purposes

Co-signing a loan is rarely advantageous for the co-signer, yet sometimes it's an appealing option. For instance, Vasileff cites one couple who were going through a divorce while one spouse was unemployed and the other was caring for the couple's young children.

"They are at risk of losing the house, so the wife's parent has co-signed their mortgage so they can keep it," she says. "It's a tough situation."

Spouses also should address the cost of refinancing, which can amount to several thousand dollars, Vasileff notes.

Selling might be smarter

The initial decision to keep the house involves two very different decision trees: one is emotional, the other is financial.

"The financial one may be black-and-white," Vasileff says, "and yet it's the emotional one that tangles it up."

To make the decision, spouses should try to focus on facts rather than feelings. Vasileff says spouses should obtain credit reports and current mortgage statements and analyze their house-related expenses relative to their income. That will help them figure out whether it's financially feasible for one spouse individually or both spouses living separately to continue to own that home.

For many couples, keeping a once-shared house post-divorce involves major financial sacrifices.

"However they've been spending in the past has to be compromised to support the house," she says.

If refinancing isn't an option and the risks of keeping the mortgage aren't acceptable, selling the house might be the best move. If the loan is underwater, a cash payment or the lender's approval of a short sale will be required for a sale to close.

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More help from HSH.com

  • Are ten-year fixed-rate mortgages (FRM) available anywhere?

    Sure! Virtually all lenders who sell product to Fannie Mae or Freddie Mac will be able to offer you mortgage with a 10-year term. However, interest rates are usually the same as the lender's 15-year offerings. If you find a great lender and rate, but they don't offer a 10-year term, you can always make yourself one. Using an amortization calculator, plug in the particulars for your loan with a 10-year term; now, refinance as normal, then send in the payment you calculated for the 10-year loan. Voila! Instant shorter-term mortgage (in fact, you can shorten the term of the loan to any term you want using this method... just make the payment you calculated for the term you want).
  • Can we do a "cash-in" refinance?

  • How do I remove or add a name to a home loan?

    In general, the only way to remove a name from your mortgage will be to refinance or pay off the debt. This is also true when trying to add names to the mortgage. Lenders will not add nor remove names from such an obligation without the opportunity to ensure that the other borrowers have the ability to pay.
  • Is there a ten year refinance mortgage out there?

    Almost any lender that offers a fixed-rate mortgage will offer a 10-year mortgage. Mortgage rates for a 10-year mortgage usually aren't any better than the rates offered for a 15-year mortgage. That said, be sure to shop around to find a competitive rate. Getting a fixed-rate mortgage with a term as short as 10 years will save you a lot of money on interest costs.
  • Living on investment income. Can we refinance our Jumbo mortgage?

    Have you talked to your investment advisor (if you have one)? Some firms will make mortgages for clients with different rules than those you'll find in the open market.

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