Refinance your home before divorce, or after?
Certainly, if you are contemplating a divorce, you have plenty of other things on your plate. Still, a divorce will almost certainly shake up your financial situation – not to mention your living arrangements – and refinancing can help you manage your living needs and financial obligations in light of the new reality.
Whether or not this should take place before or after the divorce depends on the circumstances. What follows are some pros and cons of getting refinancing out of the way before a divorce.
Pros: Reasons to Refinance Before Divorce
- It can help establish the equity value of the home. There are other ways of getting an appraisal done, but getting a mortgage company to sign off on the appraised equity value is an extra level of independent confirmation that the equity value is accurate. This way, each spouse will know how that value should factor into the division of assets.
- Knowing what payments you are facing can be the key to deciding whether or not to keep the house. Any discussion of whether or not one of you wants to keep the house should hinge on the affordability of the payments – something you will know more accurately if you are able to refinance before you decide who keeps what.
- You may qualify for a mortgage better as a couple than individually. This is especially true if you are a two-income couple. That combined income probably puts you in a much better position to qualify for a loan, so refinancing before you divorce may be your best shot at getting approved.
- A lengthy divorce could cost you your refinancing opportunity. Mortgage rates are unusually low these days, but they could move at any time. Divorces have a way of dragging on, so if you wait you will be playing a game of chicken with the interest rate market, hoping rates don't return to more normal levels before your divorce goes through. Why not take the interest rate opportunity now while you know it is still available?
Cons: Reasons Not to Refinance Before Divorce
- Waiting until afterward clarifies responsibility for the mortgage. Whoever is keeping the house should have the sole ongoing responsibility for the mortgage. Refinancing after the divorce is a good, clean way of getting the right party's name on the mortgage – and the other party's off it.
- Whoever is taking long-term possession of the house should make financial decisions about it independently. There are judgment calls to make in any refinancing process. Why make those decisions jointly with someone who won't be sharing the ongoing responsibility – especially when irreconcilable differences are ending your marriage? If you respect your spouse's financial savvy you can always seek that advice after you divorce, but then you will have the freedom to apply that advice as you see fit.
- Refinancing afterward could more fairly balance the costs and benefits of refinancing. The nature of refinancing is that it tends to involve upfront costs in exchange for long-term benefits. Why take on those costs jointly if only one of you will be reaping the long-term benefits by assuming the mortgage long-term?
- Cash-out refinancing can provide the liquidity for one spouse to buy out the other. Since home equity is often a couple's biggest asset, finding the liquidity to divide up that asset without selling the home can be tricky. Cash-out refinancing can allow the spouse who takes on the house to access the liquidity needed to pay off the equity owed to the other spouse.
Whether you come down on the "pro" or "con" side of refinancing before divorce depends greatly on the individual circumstances of your divorce, your finances, and your home and mortgage situation. At the very least, though, you should contemplate refinancing before divorce – after all, once that opportunity is missed there is no going back, and perhaps both spouses can best assess the division of property and financial obligations if they have an idea of what the mortgage payments will look like going forward.