How to Refinance Your Mortgage After Divorce

When going through a divorce, one of the many major decisions to make is what to do with the house. Refinancing the mortgage is an option that is often considered by couples who are going through a divorce, and for good reason. You can access several benefits by refinancing a mortgage after a divorce and making a clean break. However, there are many factors to consider before you refinance after divorce.

Understanding How to Refinance After Divorce Works

Refinancing a mortgage essentially means replacing the current mortgage with a new mortgage. For couples who own a home together, refinancing after divorce can be a good option to divide assets and financial responsibilities. It’s possible for couples to refinance the mortgage any time before or after the divorce is filed.

Why Consider Refinancing Your Mortgage after Divorce?

You might consider several reasons for refinancing your mortgage regardless of other personal factors in your life. After divorce, refinancing can be a good option for many couples for a variety of reasons. 

Lower Interest Rates 

One of the main reasons to consider refinancing a mortgage is to get a mortgage with a lower interest rate. The interest rate on a new mortgage could be lower because interest rates have fallen since the original mortgage was taken out. You might also qualify for a lower interest rate if your financial situation and credit score have improved since taking out the original mortgage.

Change Loan Terms 

Refinancing can help you get home loan terms that might be better for your current situation. By refinancing, you’ll have the option to choose an adjustable-rate mortgage or a fixed-rate mortgage, which can be attractive if you don’t like the terms of your original mortgage. It could allow you to extend your repayment period, making monthly mortgage payments lower.

Remove Ex-Spouse From Mortgage 

For couples who are going through divorce, refinancing can allow you to remove one spouse from the mortgage. By refinancing in only one spouse’s name, that person will have the sole responsibility for the mortgage and the property. 

Cash-Out Equity 

Couples can also consider a cash-out refinance, which allows you to cash out some of your home equity in addition to changing the mortgage loan terms. With this type of refinance, the original mortgage is replaced with a larger mortgage. The difference is cashed out and paid to the homeowner as a lump sum payment. 

Consolidate Debt 

A similar refinancing option can be used to pay off other debts, including credit cards and personal loans. It works similarly to cash-out refinancing because you borrow more than you currently owe on the mortgage. Then, instead of the money being cashed out to the homeowner, it can be put toward paying off other creditors. The accounts are typically paid off at closing.

5 Steps to Refinance Your Mortgage After Divorce

If you’ve decided that refinancing is the right decision for you based on your financial goals and situation, these are the steps you need to follow for a successful refinance.

1. Gather All Necessary Financial Documents

You’ll need to have financial documents ready so you can use them during the mortgage application process, including income statements, bank statements and tax returns. 

Your mortgage lender will need to review these documents to assess your current financial situation.

2. Find a Mortgage Lender

The next step is to start looking for a mortgage lender. You can start by seeing what refinance options your current mortgage lender offers. You should also research other mortgage refinance lenders and compare your options to find the refinancing terms that work best for your situation. 

3. Review and Compare Refinance Offers 

Once you have a few mortgage lenders picked out, you can begin to apply for mortgage refinancing preapprovals. You can then compare the rates and terms of your pre-approval offers to determine which mortgage lender you want to work with. 

4. Attend the Closing

After you’ve selected a refinancing offer, you can schedule a closing with your lender to finalize the process. At the closing, you’ll need to review the lender’s documents to ensure that all the terms are what you expected. Then, you’ll sign the documents and enter into the terms of your new mortgage.

5. Update Homeowner's Insurance and Other Relevant Information

When you refinance, you’ll have to make sure that you update other important pieces of information as well. You’ll need to reach out to your homeowner’s insurance provider to let them know about the refinance and changes to the names and contact details that should be attached to the policy. Additionally, you’ll need to make sure that you update your home’s title to ensure that only the appropriate parties are listed. 

Compare the Best Mortgage Refinance Companies

Factors to Consider When Refinancing Your Mortgage After Divorce

Refinancing can be a good option for some couples after a divorce. However, it is a major decision, and several factors need to be taken into consideration.

Financial Implications

Dividing up finances and financial responsibilities is a major part of divorce and can have an impact on whether refinancing the mortgage is going to be an option. For most couples, refinancing the home means that they will go from both being responsible for the mortgage to only one person being responsible. Before applying to refinance, the person who intends to take over the mortgage needs to ensure that they have the necessary income and resources to qualify for the new mortgage.

Equity Distribution

The distribution of the home’s equity is also something that needs to be discussed. Some couples may decide to have one person buy out the other person’s share in the home. If a cash-out refinance is being considered, the distribution of the lump sum of money also needs to be taken into consideration. 

Mortgage Terms and Rates 

When refinancing after a divorce, it’s especially important to carefully review the terms and interest rates that lenders are willing to offer. In some cases, the mortgage lender may not be able to offer more favorable terms because of current market conditions or the major shift in the couple’s financial situation. Before moving forward with a refinance, you need to make sure that the terms of the refinance are going to make sense in the long run. 

Legal Considerations

The legal aspects of refinancing after a divorce can be tricky. It’s important to discuss the refinance with an attorney to ensure that there won’t be unexpected surprises. In some cases, an attorney may suggest getting a court order or written agreement to outline the division of assets as well as the terms of the refinancing. 

Time and Documentation Requirements

A divorce results in plenty of paperwork and major decisions to deal with. Refinancing is another task that requires time and careful consideration to gather documentation, research options and more. 

Emotional and Communication Challenges

Navigating the refinancing process after a divorce can be stressful for both parties. It requires both parties to communicate and make decisions together and can add more emotional turmoil to an already difficult situation. 

How Long Do You Have to Refinance After a Divorce?

There's no set time limit for refinancing after a divorce, but several factors can influence the timing. Generally, it's best to refinance as soon as possible after the divorce is finalized and the property settlement agreement is in place. This allows you to remove your ex-spouse from the mortgage and take full ownership of the property if that's part of your divorce agreement.

It's important to note that lenders typically require a waiting period after major life events before approving a refinance. This period can range from a few months to a year after your divorce is finalized. Additionally, if you're planning to use alimony or child support as part of your income to qualify for the refinance, most lenders will want to see a history of consistent payments, usually for at least six months to a year.

What Happens if You Can't Refinance After Divorce?

If you're unable to refinance your mortgage after a divorce, you may face some challenging financial and legal situations. The most immediate concern is that both you and your ex-spouse remain legally responsible for the mortgage payments, regardless of who lives in the home or what your divorce agreement states. This means that if one party fails to make payments, both credit scores could be negatively impacted, and you could risk foreclosure. Additionally, the debt will continue to appear on both credit reports, potentially making it difficult for either party to qualify for new loans or credit.

To address this situation, you have several options to consider:

• Explore alternative refinancing options, such as FHA loans or non-traditional lenders.
• Sell the home and split the proceeds, which can help both parties move on financially.
• Consider a loan assumption, where one spouse takes over the existing mortgage.
• Negotiate with your ex-spouse to continue the current arrangement while working to improve your financial situation for a future refinance attempt.

In any case, it's crucial to communicate openly with your ex-spouse and possibly seek legal and financial advice to protect your interests and find the best solution for your circumstances.

Should I Refinance After Divorce?

Some couples might consider refinancing after a divorce as part of dividing up their assets and financial responsibilities. However, it is a major decision that requires careful thought and consideration. Both parties should consider their personal financial situation and how they want to divide up their assets before pursuing a refinance. 

Frequently Asked Questions