Rising Mortgage Interest Rates and Divorce
No Legal Advice Intended: This information is not intended, and should not be taken, as legal advice on any particular set of facts or circumstances. You should contact an attorney for advice on specific legal problems.
Resolving the issue of real estate was already difficult enough in Colorado’s hot real estate market without high interest rates. The jump in rates over the past year makes this piece of the divorce puzzle even more challenging. With interest rates at their highest level since April 2002 jumping from 3% to 7% in about a year, qualifying for a mortgage on a single income is even more difficult.
In this blog, we review the two most common problems and suggest a few possible resolutions at the end. Don’t expect to find a resolution to every situation here though. The hard truth is that there may be no way to pay out your spouse and obtain a mortgage and that the house simply must be sold.
For most divorcing couples, their home is their most valuable asset. In divorce in Colorado, marital property is subject to division in divorce. Marital property usually includes assets obtained during the marriage, as well as the increase in value of assets owned individually prior to marriage. The most common resolutions involving houses in divorce are to either 1) sell the residence and split the proceeds, or 2) for one spouse to keep the house, refinance the mortgage, and cash out equity to pay out the spouse’s share.
This means that in a typical scenario where a couple purchased a home during the marriage, if one party wishes to keep the house they must find a way to compensate the other spouse up to potentially half the home’s equity value (market value minus mortgage debt and HELOC debt). Even if the equity payout is not very high, if both parties are obligors on the mortgage, the spouse keeping the house must find a way to obtain a mortgage solely in their name. With high interest rates, qualifying on a single income for a mortgage is even more difficult.
Example Problem #1: Inability to Obtain a Mortgage on Single Income
If you wish to be the spouse who keeps the marital residence with a mortgage, you will need to be able to obtain a mortgage on the house solely in your name based on your income. (See our blog about Who Gets to Keep the House). It is impractical and no resolution at all for a spouse to receive possession of a house they cannot obtain a mortgage for. It is important to begin speaking with lenders early in the process to learn what mortgages your sole income qualifies you for and whether keeping the house is feasible. The increase in interest rates means your income does not go as far as it used to. A higher interest rate increases your monthly payment. It is not uncommon for this year’s increase in interest rates to increase the monthly mortgage cost by $1,000 for many homes in Northern Colorado. It’s a tough reality for many that the mortgage they can easily afford currently becomes unaffordable if they refinance at the new rate to remove their spouse from the mortgage. Child support and maintenance can be considered qualified income for a mortgage, but usually you must have a history of actually receiving them for six months.
Even if you do not have to make a payout to your spouse, if your spouse is on the mortgage you will need to refinance to remove them from the mortgage obligation. A large purpose of the divorce process is to disentangle your financial lives. Most spouses find it unacceptable to remain on a mortgage with their ex-spouse. It affects their lendability, their renting ability, and exposes them to liability for the mortgage.
If there is only one spouse on the existing mortgage and they keep the house, then they could maintain the same mortgage unless they must cash out equity via a refinance. However, see problem #2.
Example Problem #2: Inability to Obtain a Cash Out Refinance to Pay Out Spouse’s Share
Rising home values in Colorado are usually a good thing for owners, but have created challenges in divorce for the past couple years. When a home’s value increases dramatically, it can be impossible for one spouse to come up with the amount necessary to pay the other spouse their portion of the home’s value. You will likely be required to buy out your spouse’s half.
You may be able to avoid refinancing the home to pay out your spouse’s equity share by transferring assets to them from another source, such as retirement accounts. If your spouse is willing to work with you, you might also resolve the issue by making monthly payments to them (provided it does not disqualify you from obtaining a mortgage in the first place).
However, if the only assets available to pay your spouse are from the equity in the home, your only option to keep the home may be a cash out refinance. A cash out refinance is a mortgage where you take a loan for an amount of the equity in the house beyond the existing mortgage and receive that amount in cash. You use that cash to pay your spouse their share of the equity.
This scenario requires that you’re able to not only afford the existing mortgage on the house, but an even larger mortgage including the amount you must pay out your spouse. If you have a greatly increased home value from the time you purchased it, you may find that the large pay out necessary to your spouse makes this financially impossible.
For example, if you married in 2014 and you purchased a home in 2015 for $550,000 with $50,000 down, you would have a $500,000 mortgage and immediately have $50,000 in equity to share with your spouse if you divorced in 2015. You could potentially have to pay your spouse $25,000 related to the home’s equity. That could require a cash out refinance mortgage of $525,000.
If you divorce in 2023 and the home increased in value to $850,000 (usually determined by appraisal) and you’ve paid down the mortgage to $450,000, there would be $400,000 in equity to share with your spouse. You could potentially have to pay your spouse $200,000 related to the home’s equity. That could necessitate a cash out refinance mortgage totaling $650,000 (the existing $450,000 mortgage plus $200,000 cash out). So the mortgage required would jump substantially from $450,000 to $650,000 just to keep the house you bought initially with a $500,000 mortgage.
If you are the only spouse obligated on the mortgage (meaning you don’t need to refinance just to remove your spouse from the mortgage obligation):
You could try to pay your spouse’s equity share by shifting them assets from another source, such as retirement funds, bank accounts, vehicles.
You could try to negotiate a monthly property settlement payment to your spouse. However, cash is more valuable immediately rather than over years so this is a rare resolution.
If you wish to stay in the house and you are on the mortgage with your spouse (meaning you need to refinance to at least remove them from the mortgage):
Check with your lender to see if a mortgage assumption is an option. This would allow one obligor on the mortgage to take over the mortgage entirely without the necessity of refinance at a higher interest rate. This option is great if it exists, but a minority of lenders offer it. If you need to pay your spouse out of their share of the house, consider other marital asset sources to shift to them (retirement funds, bank accounts, vehicles).
If you have difficulty refinancing solely on your income but will receive child support and/or maintenance, see when your lender will include those payments as qualified income.
If your spouse will owe maintenance, would they agree to instead include the lump sum of maintenance to reduce their share of the home buyout? Doing the same with child support is not usually an acceptable resolution to the court except in rare scenarios (yes, the judge has to approve your agreement.
If you cannot qualify for a mortgage alone, consider whether a family member (not your spouse) would co-sign on the mortgage with you.
Read More about Colorado Divorce Basics: