Are you planning to keep the house in the divorce? If so, that entails taking your ex’s name off the mortgage and getting a mortgage that is solely in your name. In other words, you most likely are going to be refinancing your mortgage in the divorce.
How do you refinance the mortgage in divorce?
Most people don’t know this, but there are two ways you can refinance the mortgage: a buy-out or a cash-out. What’s the difference and why does it matter?
Buy-out vs. Cash-out Refinancing During Divorce: What’s the Difference and Why It Matters
Here’s a big tip.
Are you familiar with the difference between a buy-out and a cash-out refinance? If not, it could cost you a lot of money—and it’s important to know this because your lender likely doesn’t!
How Mortgage Rates Are Determined
Mortgage rates aren’t uniform for everyone—they’re based on individual risk factors. The higher your perceived risk, the higher your interest rate and fees. Factors like your credit score, loan-to-value ratio (LTV), and property type all play a role.
Years ago, the Federal Housing Finance Agency (FHFA) introduced a system that adds fees to mortgage rates based on certain risk layers. One of those layers is cash-out refinancing, which applies when you take equity out of your home. The more equity you access, the higher the associated fees.
Why This Matters Refinancing Your Mortgage in Divorce
During a divorce, when you need to refinance your home to buy out your ex-spouse, many assume they’ll have to opt for a cash-out refinance. But doing so could mean paying significantly higher fees and a higher interest rate. The smart move? Structure your refinance as a buy-out instead, and you could avoid those extra costs.
Unfortunately, not all lenders are aware of this option, which is why it’s crucial to work with a Certified Divorce Lending Professional (CDLP). A CDLP understands the nuances of divorce-related refinancing and can help you lock in the best terms possible. This is especially important if you’re already losing the benefit of a low-rate mortgage.
The Key: Strategic Debt Allocation
One key point to keep in mind: with a buy-out refinance, you can only pull out the amount needed to pay your ex-spouse their share of the equity. You can’t use these funds for personal expenses like attorney fees or paying off other debt. However, if you’re working with me, we can explore ways to strategically allocate your debt during the divorce process, which could allow you to cover those additional expenses. This requires careful planning but could be a valuable opportunity during your divorce.
Side Note: Loan-to-Value Ratios
A lesser-known benefit of a buy-out refinance is the ability to borrow up to 95% of your home’s value, compared to the 80% cap with cash-out refinances. While it’s rare to need that much, the real advantage lies in securing a better rate and avoiding unnecessary fees.
In closing, refinancing during or after divorce doesn’t have to be stressful! The key is to work with a mortgage lender who can maximize your savings and get you the lowest possible monthly payment. I’m here to help if you’d like a complimentary consultation.
Karla Kyte is a Branch Manager and Originating Loan Officer at Cross Country Mortgage. She runs a successful team of high energy loan officers and assistants who are eager to help you through the home-buying process! From day one, over the last 25 years, Karla has built a successful business on referrals, which is why she and her team are committed to educating buyers on their financing choices throughout the process.
In addition to holding a mortgage license, Karla is also a Certified Divorce Lending Professional (CDLP). In all her years of doing mortgages, she could never understand why divorce attorneys did not consult with a lender before they put demands on clients that were not achievable due to lending guidelines. Karla brings financial knowledge and expertise to the often complicated untangling of a marriage. Those facing divorce need a great divorce team that is well versed in all aspects of the process, and a CDLP is a big part of the successful outcome of the divorce, as we help to structure the equity buyout of a retained home as well as the qualification of purchasing a new home.
Like this article? Check out “What is a Certified Divorce Lending Professional?”
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