Should I Refinance or Assume the Mortgage on the Marital Home?

November 14, 2018

The discussion about division of assets initially revolves around the marital residence, as jointly owned real estate and retirement are perhaps the most significant marital assets subject to distribution in a divorce.
The decision whether to retain or sell the residence can be laden with emotion and financial concerns. One or both parties may have sentimental or “sweat equity” attachment to the property. The parties may want their school age children to remain in the school district and may be unable to find suitable housing for rent in the district.  These issues have high priority on the agenda during the collaborative process. The parties may invite a financial professional to participate on the collaborative team and assist them in the decision process.
Say, for example, that the parties agree that one party will transfer his or her interest in the residence to the other. The new Deed is only one part of the process. The party receiving ownership of and title to the property may be required to remove the other party from the mortgage obligation. Since the mortgage lender is not required to release a party from their financial obligation on the mortgage, the only way this can be accomplished is to refinance the mortgage, unless the existing mortgage allows for mortgage assumption.

Jeff Weaver, a Certified Divorce Lending Professional and member of Collaborative Law Professionals of Southeastern Pennsylvania, writes about the pitfalls of mortgage assumption in his November newsletter, “Avoiding Acceleration of Mortgage in a Divorce Situation”.  He advises how important it is to notify the current mortgage lender of any change in ownership transfer to avoid an acceleration of the mortgage and offers a sample letter which will serve as notice to the mortgage servicer.  A loan assumption is a transaction in which the party receiving an ownership interest in a property accepts full responsibility for the terms, payment and obligations of the mortgage. Jeff Weaver cautions that a loan assumption will not necessarily release the other party from his or her obligations on the promissory note. There are inherent risks in any loan assumption.  The new owner may stop making mortgage payments, which not only affects the credit rating of the other party, and but it may expose that party to a foreclosure lawsuit.

Questions to Ask your Personal Financial Specialist

There are many factors to consider in a mortgage refinance. Will the party receiving title to the property qualify for a mortgage based upon their current income? If that party will be receiving support, how many months of support payments will be required for that party to qualify for a mortgage? Will a party paying support to the other have sufficient disposable income to afford suitable housing for himself or herself and minor children?
Often, a mortgage refinance involves a cash payment to the other party in consideration of the transfer of ownership.  The timing of the refinance is a matter for discussion, particularly if one party needs cash and or the removal of the mortgage obligation to purchase another residence. A “cash out” refinance, however, may increase the mortgage payment to such an extent that it is not practical for either party to retain the marital residence.
If the residence is “under water”, which means that the value of the residence is less than the balance of the mortgage, or has little to no equity, a refinance is not possible.  In either event, the parties should not expect to receive any proceeds from sale of the property.  In the event the house is “under water”, a “short sale”, in which the mortgage company agrees to accept less than the balance owed, may be the only solution.

Financial Concerns About Mortgages and Divorce

Financial concerns may force the parties to list the residence for sale. If they have already separated, the parties will need assistance from the collaborative team on allocation of responsibility for payment of mortgage, taxes, insurance, utilities, maintenance and repairs. They should agree on a realtor to list the house and a listing price. The party residing in the residence pending sale may be expected to have the house in “staged” condition for showings to potential buyers.
The decision whether to remain in the house, assume or refinance the mortgage, or place the house on the market is one of the most important decisions a couple will make, as it affects custody of minor children, support and equitable distribution.  The collaborative process allows the parties to minimize the emotional and financial costs involved by not going to court. The parties will work closely with their attorneys and members of the collaborative team to explore options which meet their needs and achieve a resolution without conflict.
Learn more about Collaborative divorce in Pennsylvania from a lawyer, financial or mental health professional with the Collaborative Law Professionals of Southeastern Pennsylvania.

About Rochelle Bobman

Rochelle Bobman, a court-appointed Mediator in the Court of Common Pleas of Montgomery and Chester Counties, practices family law with Bort Law.  She is a member of the Collaborative Law Professionals of Southeastern Pennsylvania and the Collaborative Law and Mediation Committees of the Montgomery Bar Association. She has extensive experience in divorce matters and custody often representing parents in dependency and involuntary termination matters.
Click here to learn more about Rochelle Bobman.