As mortgage interest rates soar to a 22-year high, divorcing couples face yet another hurdle as they work to disentangle themselves from one another. With the average 30-year fixed mortgage rate exceeding 7%, divorcing couples must make increasingly complicated decisions regarding property division, housing arrangements and the overall financial stability for both parties involved.
Divorcing couples often have an emotionally charged time determining what to do with the family home (also called the “marital residence”). Traditionally, there are two primary ways of addressing a family home encumbered by a mortgage during a divorce. In the first option, one party keeps the home and refinances the mortgage to remove the other party’s name from the debt and to buy that spouse out of any equity that they have in the home. In the second option, the parties sell the home, pay off the mortgage and divide the proceeds.
With interest rates at a 22-year high, however, the first option is becoming increasingly less desirable as the party looking to refinance can end up with significantly higher monthly payments under the current rates. While one may think that has caused parties to default to the second option and sell the home, falling housing prices and the anticipated downturn in the housing market have deterred some parties from selling their homes at this time, particularly if the sale may lead to a loss.
This has led couples to embrace creative solutions regarding jointly-owned property. Some couples opt to continue owning the property together, and in some cases even continue to live together, until refinancing becomes more appealing. Some eligible parties have explored mortgage assumption, the process of transferring an existing mortgage to another party. Other parties are deciding not to refinance and are electing to remain on the mortgage while the spouse remaining in the residence repays the other spouse’s portion of the equity over time.
The decision to “wait out” the market or extend the time frame for refinancing post-divorce, how-ever, does not come without risks and difficulties. A party that agrees to remain on the mortgage risks credit score implications and may face difficulty immediately qualifying for another mortgage. This may prevent that spouse from securing a new residence until their name is removed from the underlying mortgage on the marital residence.
High mortgage interest rates do not just impact property division in divorce. A higher interest rate environment might lead to tighter budgets and financial strain, affecting each spouse’s financial stability post-divorce. This can influence negotiations over spousal and child support payments.
Ultimately, mortgage interest rates can significantly impact divorce proceedings, shaping decisions about property division, housing arrangements and support. As couples and their legal and financial representatives navigate the complexities of the divorce process, they must consider the potential effects of these mortgage interest rates on short-term and long-term financial outcomes. By weighing these economic realities, individuals can make informed decisions that set the stage for their post-divorce financial well-being.
This article originally appeared as a column for the Cleveland Jewish News.