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Divorce, Rising Interest Rates and the Family Home

by | Nov 16, 2022 | Family Law, Mediation

Since I started mediating divorces in 2003 there have been a variety of housing trends over the years that have impacted dealing with houses in the divorces that I have handled.  House values have skyrocketed then plummeted.  Interest rates have fluctuated.  Qualifying for loans and refinances became extraordinarily simple, then incredibly difficult.  Over this past year it seems like every couple of months the Federal Reserve is announcing another raise in interest rates pushing historically low mortgage rates to high levels not seen for years.  So how has rising interest rates impacted dividing houses in divorce this year.

The two most common approaches to dividing houses in divorce are to sell the residence and split the proceeds, or for one spouse to refinance the mortgage, pull half the equity out and buy out the other spouse’s interest.  I had the opportunity this past week to sit down with Cristen Carver, a mortgage loan broker with Barrett Financial, Justin Benscooter, a loan broker with Guaranteed Rate Affinity and Shylia Alarcon, a realtor with Big Block Realty.  I asked them about what challenges they are facing given the rising interest rates.  Both loan brokers mentioned that in a relatively short period of time mortgage rates on 30 year fixed mortgages have moved from below 3% to close to 7%.  Cristen Carver mentioned the volatility of the rates and having clients who hesitate to timely lock in a rate, finding that sudden shifts significantly increase the cost of the loan.  Shylia Alarcon mentioned that the rising interest rates have reduced the amount that buyers can qualify for reducing the pool of eligible buyers and thus reducing home values.  Based on this information the rising rates seem to be making it harder for one spouse to buy the other spouse out, and is likewise resulting in diminished sale proceeds when houses are sold. 

Divorce Mediation provides a lot of space for imagination and creativity in coming up with solutions to complicated house issues.  If you turn to the Court to address the house division issue the options are either for the house to be sold, or for one spouse to refinance right away, buy out the other spouse, and have them removed from the loan secured by the residence.  The recent rise in interest rates make selling or immediately refinancing not very attractive alternatives.  Many couples have their current mortgage rates below 3% and with current rates closer to 7%, refinancing without even taking any money out is resulting in significantly higher house payments if forced to refinance.  With sale prices falling the net proceeds from sells are decreasing.  If spouses are looking to buy another property with their portion of the sale proceeds, the higher rates are making them eligible for less house. 

So what other options are there?  While divorce settlements seek to disentangle the finances of the spouses, the current housing and financing environment makes it attractive to consider other options.  Continuing to jointly own the residence is one option where the couple defers the buy out or sale to a later date.  Proceeding with the buyout while not requiring a refinance is also an option.  If there are other community assets available to fund the buyout of the other spouse, there is the option of that spouse being fully bought out while temporarily remaining on the loan.  Justin Benscoter indicated that if the bought out spouse has a Divorce decree confirming that the house and loan obligation are awarded/assigned to the other spouse, then when the bought out spouse seeks to qualify for a loan, the prior loan does not negatively impact the qualifying for the new purchase loan.  Benscoter indicates that this is true for most of the big lenders.  Both Carver and Benscoter share the belief held in the industry that interest rates are likely to go down in the next year to year and a half, so delaying the requirement to remove the bought out spouse from the loan can allow both spouses to get into a home with hopefully lower interest rates on the horizon.  One area where remaining on the loan can become a problem is if the spouse who assumes responsibility for the loan fails to make timely payment, the other spouse’s credit can be negatively impacted which could impact credit scores and loan qualifying.  

When working with couples who are open to finding creative options to tackle the house issue, it is important that they understand that the Court would not require a spouse to stay on the loan in a buyout situation and would not require a spouse to wait to obtain their equity from the home.  While the loan officers indicated that lenders would not count the mortgage assigned to the other party against qualifying, some lenders may not follow this guideline.  When crafting settlement language, the agreement can include requirements that timely payments be made on the mortgage while the other spouse is on the loan with the requirement for immediate sale if any payment falls more than 30 days behind.  A provision is also suggested that if ever the spouse who is on the loan wishes to be removed, they have the option to request to be removed at that time and the other spouse is given 90 days to refinance.  If they are unable to timely do so, they are required to sell to get the other spouse off the liability.  Mediating couples are often trying to help the other spouse stay in the home for added stability for the children or other reasons and getting creative is sometimes the only way to make hanging onto the house by one spouse realistic.

Rising interest rates have made the house division issue in divorce a challenging one over this past year.  Working together with your spouse through mediation and getting creative can put more options on the table which may serve to best meet the needs of the family as it moves through the divorce to the next chapter.