What to do with the Home Mortgage in Divorce

With mortgage rates higher than people have seen in recent years, couples often struggle at the time of divorce with how to get their soon to be ex equity from the home while not increasing their monthly mortgage payment. This is called an “equity buy out” and is what most people think is the only way, and a necessary, way to get the spouse moving from the home their half of the equity. However, when faced with this issue, couples actually have more options than they think and should be open-minded to getting creative.

One party staying in the marital home, while the other moves out, is a common scenario in a divorce settlement. A party staying the home can have advantages overall regarding stability of children and a desirable mortgage payment compared to current rent prices.  When a spouse is entitled to 50% of the home equity in a divorce, they have several options for how to obtain their share. These include:

1. Sell the Home and Split the Proceeds

• The couple sells the home and divides the net proceeds (after mortgage, closing costs, and other fees).
• This is often the cleanest way to divide home equity.

2. Refinance: Buyout by One Spouse

• One spouse keeps the home by buying out the other’s 50% share.
• This usually involves refinancing the mortgage to remove the other spouse and taking out a new loan to pay them their share.
• Pros are that if the mortgage was in both names, it can be refinanced in the name of one party only.  Cons include a new mortgage interest rate which could be higher than the current rate which increases the monthly payment.

3. Offset with Other Assets

• Instead of selling the home or refinancing, one spouse may take full ownership while the other receives other marital assets (e.g., retirement accounts, investments, or cash) equal to their share of the home equity.

4. Co-Ownership with a Future Sale Agreement

• The spouses agree to keep the home (for a set period), often for the benefit of children.
• One spouse continues living there, and they agree to sell later and split the proceeds.
• When doing this parties should discuss future tax consequences, major expenses for the home like a new roof, and whether there is an end date in sight.
• This would not be a good arrangement for high conflict parties.

5. Legal Agreements (e.g., Deferred Buyout)

• One spouse may agree to a structured buyout where payments for the equity share happen over time. Payments could be made monthly, quarterly, annually or paid in the future when the home sells.

6.  Home Equity Line of Credit (HELOC)

• The spouse staying in the home could undertake a HELOC to pull equity from the marital home. This is desirable as a HELOC does not change your mortgage payment.
• Things to consider with a HELOC: variable interest rates, fluctuating monthly payments, potential for over-borrowing, and a negative impact on your credit.

7.  Mortgage Assumption

• A mortgage assumption is when one spouse (or another party) takes over an existing mortgage under its current terms, instead of refinancing or getting a new loan. This can be useful in a divorce when one spouse wants to keep the home without having to secure a new mortgage.
• Take note of these facts: not all mortgages are assumable, lender approval is required, there is still a cost for an assumption and equity buyout may still be needed.