Dividing assets during a divorce is never simple, and when a marital home is involved, the situation becomes even more complex. Many divorcing couples find themselves facing an important question: Do you need to refinance your home to buy out your spouse? Given today’s high interest rates, making the right financial moves is critical to protecting your long-term stability after divorce.
Understanding the Buyout Process in Divorce
When divorcing in New Jersey and one spouse wants to keep the marital home, they typically need to compensate the other spouse for their share of the property’s equity, which is known as a “buyout.” In most cases, this means refinancing the mortgage under the name of the spouse who is keeping the home. This process serves two purposes: It removes one spouse’s name from the loan, and it provides the funds necessary to complete the buyout.
Why Consider Refinancing?
Refinancing can be beneficial because it allows for a clean break. If both spouses remain on the existing mortgage, the person who moves out is still financially tied to the home. Even if an agreement is in place for the remaining spouse to make all payments, any missed or late payments could affect both parties’ credit scores, which is why most lenders and attorneys recommend refinancing when assets need to be divided, and one spouse wants to retain ownership of the home.
Do You Have to Refinance to Buy Out Your Spouse?
Refinancing is the most common method for a buyout, but it’s not the only option. Depending on your financial situation and the amount of equity in the home, you might be able to explore alternatives.
1. Paying the Buyout in Cash
If you have significant savings, investments, or other assets, you could negotiate a cash buyout, meaning you’d pay your spouse their share of the home’s equity without refinancing. This option avoids higher interest rates and eliminates closing costs associated with a refinance. However, it requires access to substantial liquid assets, as you would need to pay off the mortgage also, which isn’t always feasible.
2. Trading Other Assets
In some cases, spouses agree to offset the home’s equity by trading other marital assets. For example, if you’re entitled to a portion of your spouse’s retirement account, you could waive that claim in exchange for keeping the house. This method avoids the complications of refinancing, but it requires careful valuation of assets to ensure an equitable division.
3. Assuming the Existing Mortgage
Some loans allow one spouse to assume the existing mortgage without refinancing. Mortgage assumption means taking over the loan with its current interest rate and terms. This option can be attractive if the interest rate on the existing mortgage is lower than current market rates. However, not all lenders permit mortgage assumptions, and you’ll need to meet their qualifications to take over the loan.
How High Interest Rates Affect Refinancing Decisions
If you’re considering refinancing, high interest rates can pose a significant challenge. A rate increase could mean significantly higher monthly payments, making homeownership less affordable. Here’s how to approach refinancing when rates are high:
1. Calculate the Impact on Your Monthly Payment
Before committing to a refinance, determine how much your new mortgage payment will be compared to your current one. Consult experienced professionals to understand how an increased rate will affect affordability.
2. Shop Around for the Best Rate
Lenders offer different rates and loan terms, so it’s important to shop around. Don’t settle for the first quote you receive. Compare offers from multiple banks, credit unions, and mortgage brokers to secure the best possible terms.
3. Consider a Temporary Buydown
A temporary buydown allows you to secure a lower interest rate for the first few years of the loan, giving you time to refinance when rates decrease. Some lenders offer 2-1 buydown programs, which lower the rate by 2% in the first year and 1% in the second before adjusting to the full rate. If you expect rates to drop in the near future, this strategy can help manage costs in the short term.
4. Improve Your Credit Score Before Applying
A higher credit score can help you qualify for a better interest rate. If you have time before refinancing, work on improving your credit by paying down debt, making on-time payments, and avoiding new credit inquiries. Even a small improvement in your score could lead to a lower mortgage rate.
5. Explore Loan Programs That Offer Flexibility
Some lenders offer specialized programs that help borrowers manage high interest rates. Adjustable-rate mortgages start with a lower fixed rate for a set period before adjusting based on market conditions. If you plan to sell or refinance within a few years, an ARM might be a practical solution.
Negotiate the Buyout Amount
Once you know the home’s equity and your loan options, work with your spouse and your attorneys to agree on a fair buyout amount. The buyout is usually half of the available equity, but it can be adjusted based on other financial considerations in the divorce settlement.
Seek Legal Guidance
Refinancing to buy out your spouse can be a practical solution, but it’s not the only path forward. By understanding your options and developing a plan with a good team at your back, you can make a financially sound decision that supports your future stability. Call Edens Law Group at 908-529-0353 to schedule a consultation with us today.
