The Latest Divorce Dilemma: Who Inherits the Advantageous Mortgage Rate?

Navigating a divorce is challenging on many fronts, but for Ann Shea, 44, in suburban Chicago, the stakes were even higher. As she finalized her divorce last year, she faced a tough decision: she wanted to keep the family home where her school-age kids were growing up, but she was equally determined to retain the advantage of her relatively low mortgage rate.

Having purchased the house in the summer of 2012, Ann had managed to refinance during the pandemic, securing a remarkably low rate of 2.8%. This financial boon was not just about saving money; it was about providing stability for her children, who were still young and deeply rooted in their school and community.

However, the path to sole ownership of the home and its mortgage wasn’t straightforward. To transfer the mortgage and the title into her name alone would necessitate a refinancing process. Yet, with prevailing mortgage rates hovering around 6% in mid-April, just as her divorce was being finalized, Ann faced the grim reality of potentially seeing her monthly mortgage payment surge by a staggering 33%.

The financial strain of divorce can be immense, and for Ann Shea, a compliance attorney, the prospect of shouldering an additional financial burden was daunting. Reflecting on her situation, she expressed her relief, stating, “The divorce was so expensive, and to think about adding on that cost would have been terrible.”

For Shea, the thought of transitioning from her 2.8% mortgage rate, which she had diligently paid for 11 years, to a substantially higher rate felt like losing ground she had worked hard to gain. Such sentiments are increasingly common as divorce negotiations take on a new dimension: who retains the benefit of the lower mortgage rate.

In recent years, as mortgage rates fluctuated from historic lows during the pandemic to two-decade highs by the end of 2023, homeowners with rates under 3% found themselves in enviable positions. Yet, in the context of divorce, the significance of holding onto such rates goes beyond mere envy—it becomes a contentious issue at the negotiation table.

Alla Roytberg, a family and matrimonial law attorney and mediator based in New York City, observed this shift firsthand. “In the past, when rates were low, it was an easy answer,” she explained, drawing on her three decades of experience in matrimonial law. “Somebody could refinance and get a 3.5% rate. And now, they have this 3% rate, and if they refinance, they’re going to get 7% or 6%—and that makes it unaffordable.”

Alternative Approaches to Resolving the Low Mortgage Rate Conundrum

Amidst divorce proceedings, couples historically either opt for one spouse to refinance the home and take sole ownership or, in contentious cases, are compelled by the court to sell the property and split the proceeds, as Erin Levine, co-founder of Hello Divorce, informed MarketWatch. Levine, a licensed family law attorney in California, has guided over 5,000 individuals through the divorce process and has observed a surge in interest from couples with property in the wake of divorce.

While these conventional methods still prevail, the significant disparity between prevailing mortgage rates and those on properties held by divorcing couples, compounded by a pricey housing market, has spurred the exploration of unconventional strategies to divide real estate assets. Couples are considering co-ownership arrangements or agreeing to continue living together for a designated period.

“People are seeking alternatives to resolve matters outside of court,” Levine noted.

The financial incentive is compelling. “We need to devise innovative solutions for handling such cases,” Roytberg added. “Some couples are barely able to sustain their current budget. How can they afford an additional three or four thousand dollars in rent when they lack the funds?”

To retain their coveted ultra-low rates, some couples are adopting innovative approaches, ranging from sale-leaseback arrangements to mortgage assumptions. Others are resorting to less sustainable interim solutions.

Delaying tactics until the market conditions become more favorable

One strategy gaining traction among divorcing couples is what could be termed as a “time-buying” approach, according to Erin Levine, co-founder of Hello Divorce, a company specializing in online divorce services.

In this scenario, divorcing spouses finalize their divorce proceedings but choose to continue co-owning the home while awaiting a potential decrease in mortgage rates. They may opt to either reside together in the property or have one spouse move out while still maintaining joint ownership to avoid the necessity of refinancing.

Levine highlighted that approximately ten percent of divorcees using her platform express a desire to retain the property, citing concerns over affordability amidst rising mortgage rates and uncertain market conditions. These individuals negotiate with their former partners for a temporary agreement, typically spanning a couple of years, during which they remain on the mortgage. In return, they may offer financial compensation to their ex-partner.

Such arrangements may involve the higher-earning spouse covering the mortgage payments instead of paying spousal support, with the added benefit of tax deductions, as explained by Alla Roytberg, a family law attorney. This setup is advantageous for both parties, as it circumvents the need for one spouse to refinance at a higher rate, while the other spouse receives financial support directly towards the mortgage.

Delaying the Mortgage Refinance Decision: Co-Ownership After Divorce

Navigating the Conundrum: The Dilemma of Low Mortgage Rates in Divorce

For many homeowners, the allure of low mortgage rates is undeniable. It’s a financial perk that offers stability and affordability in an otherwise uncertain housing market. However, for divorcing couples, these low rates can present a unique challenge, one that forces them to confront difficult decisions about their future living arrangements.

The phenomenon, often termed the “lock-in effect,” describes how high mortgage rates can essentially trap homeowners in their current residences. With rates hovering below 7% since mid-December, many homeowners are hesitant to relinquish their homes and the accompanying low mortgage rates. This reluctance has contributed to a scarcity of resale inventory, further complicating matters for potential buyers.

Despite the uncertainty surrounding the housing market, there are indications of renewed activity. Real estate professionals like Shay Stein, a Las Vegas-based agent with Redfin, note that buyers and sellers are adapting to the prevailing conditions. Some are making proactive moves, recognizing that waiting indefinitely for rates to drop may not be feasible.

However, not all divorcees are eager to make immediate decisions. Some opt for a “wait and see” approach, preferring to assess their options before committing to a course of action. Jae Tolliver, an Ohio-based mortgage broker, has encountered clients who choose to remain in their shared home post-divorce, striving to preserve the advantageous mortgage terms. Yet, Tolliver highlights the complexities of such arrangements, noting the inherent challenges of cohabitating with an ex-spouse.

These anecdotes underscore the complexities that divorcing couples face when navigating the intersection of homeownership and separation. While low mortgage rates offer financial benefits, they also pose logistical and emotional dilemmas that require careful consideration. As divorcees weigh their options, they must strike a delicate balance between financial pragmatism and personal well-being.

Sharing Ownership: A Novel Solution for Divorcing Couples

Navigating Divorce: Co-Ownership Strategies Until Milestones Are Reached

In the complex landscape of divorce negotiations, some couples opt for a unique arrangement: they continue to co-own their home until reaching a significant milestone, often tied to their children’s lives, such as their youngest child graduating from high school.

Erin Levine, co-founder of Hello Divorce, a company offering online divorce services, highlights that this decision is typically rooted in the desire to maintain stability for their children. For instance, if a child is heavily involved in extracurricular activities or has a demanding academic schedule, parents may choose to keep the family home until the child completes high school or reaches college age.

This approach allows families to provide consistency during a period of significant transition. It ensures that children can remain in familiar surroundings until they reach a point where they are better equipped to handle changes associated with their parents’ divorce.

Utilizing Sale-Leaseback Arrangements: A Creative Divorce Solution

Exploring Sale Lease-Backs: A Novel Solution for Divorcing Couples

In navigating the complexities of divorce, some couples are now turning to a less conventional option: sale lease-back agreements. This strategy, while not widely known, is gaining traction as a viable solution in the realm of divorce proceedings.

Sale lease-backs entail one party selling their share of the home to the other, who then becomes the sole owner. However, rather than vacating the premises, the selling party continues to reside in the home as a tenant, paying rent to the new owner. Additionally, there may be provisions allowing the original owner to repurchase their share at a later date.

Erin Levine, co-founder of Hello Divorce, a company specializing in online divorce services, notes that sale lease-backs have become an appealing option for divorcing couples facing financial challenges. She highlights the common predicament of impaired credit scores and financial strain following divorce, which can hinder individuals from securing alternative housing arrangements independently.

For those grappling with such obstacles, a sale lease-back arrangement offers a practical solution. By relinquishing their ownership stake in the property and leasing it back from their ex-spouse, individuals can secure a place to live without being subject to stringent credit or income requirements that might otherwise impede their housing options.

As divorce proceedings evolve to accommodate the diverse needs of separating couples, sale lease-backs emerge as a creative avenue for addressing housing concerns amidst financial uncertainty.

Embracing Hard Decisions: Facing Mortgage Rate Realities

Facing the Mortgage Rate Reality: Making Tough Refinancing Decisions

For many divorcing couples, grappling with the decision of whether to hold onto their coveted low mortgage rate or to navigate the financial complexities of refinancing is an emotionally charged ordeal. However, some are choosing to confront the issue head-on, even if it means enduring short-term financial strain.

Consider the case of a recent divorcee in San Mateo, California, who found herself in the midst of a divorce while also grappling with the prospect of losing her favorable 3.25% mortgage rate, secured back in 2020. Despite the challenges ahead, she recognized the necessity of refinancing as part of finalizing her divorce proceedings.

Opting for a refinancing route in October 2023, she aimed to remove her ex-husband’s name from both the mortgage and the title of their home, while also buying out his equity share. However, the process came at a steep cost: her new 30-year mortgage rate skyrocketed to 8.25%.

“It’s an awful rate right now, I mean, it’s ridiculous,” she lamented, acknowledging that her monthly payments more than doubled from $1,450 to $2,975. Exploring alternatives like selling the home or renting a more affordable property seemed equally daunting, as they would involve sacrificing her cherished home and enduring a higher interest rate.

Despite the financial strain, she remains optimistic, viewing the situation as temporary. A recent salary increase offers a glimmer of hope, potentially offsetting some of the increased expenses. With an eye toward the future, she hopes to capitalize on lower rates down the line, signaling a beacon of financial relief on the horizon.

In the tumultuous landscape of divorce and mortgage rates, tough decisions must be made, and for some, biting the bullet and enduring short-term discomfort is the price to pay for long-term stability and financial security.

Taking on the Mortgage: Shea’s Solution

Securing the 2.8% Rate: Shea’s Unique Mortgage Solution

Ann Shea, a divorcee residing in suburban Chicago, was adamant about retaining her 2.8% mortgage rate despite her separation. Her solution? Landing a rare mortgage assumption, allowing her to take over the existing loan jointly held by her and her husband, while maintaining the same favorable rate.

Assumable mortgages, though increasingly scarce, present an enticing option for certain sellers and buyers. However, they’re subject to specific conditions and are not widely available.

In Shea’s case, she sought guidance from Tami Wollensak, a mortgage broker and Certified Divorce Lending Professional specializing in real estate transactions related to divorce.

Wollensak advised Shea to approach her lender with a request for a loan assumption instead of pursuing a standard refinancing. Navigating the process involved contacting the appropriate department and requesting consideration for the assumption.

“It’s very unusual,” Wollensak noted, emphasizing the variability in lenders’ responses to such requests. Fannie Mae guidelines grant lenders some leeway in approving assumptions, particularly for individuals undergoing significant life transitions. However, borrowers must still meet mortgage qualification criteria and demonstrate financial capability to maintain the loan independently.

Initially rebuffed by her lender, Green State Credit Union based in Iowa, Shea and Wollensak persisted, exploring different avenues and contacts within the institution.

Ultimately, Green State Credit Union acquiesced, permitting Shea to assume the mortgage at her existing rate without her ex-spouse’s involvement. Wollensak speculated that Shea’s robust credit history might have influenced the lender’s decision. However, the lender did not provide a comment when contacted.

Shea incurred no expenses associated with the assumption, such as closing costs or fees. Reflecting on the process, Shea expressed gratitude for the perseverance and eventual success in securing the favorable arrangement.

“It was a lot of back and forth trying to find the right person,” Shea remarked. “I’m so grateful.”

Matthew Graham
Matthew Graham
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