Mortgage assumption vs. refinance after divorce

Homeownership is a dream for many families, but what happens when there’s a divorce? Divorcing couples often face difficult decisions about their assets, including the mortgage and the equity in the property.

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Two common options for managing shared property are mortgage assumption and refinancing. Both approaches allow one party to take full ownership of the home, but they differ in process, qualification requirements, and long-term financial impact. Here’s everything you need to know about mortgage assumption vs refinance after divorce.

Divorce and mortgage assumption

In a divorce and mortgage assumption scenario, one of the spouses takes responsibility the loan and continues making the payments. This eliminates the cost of a refinance and avoids higher interest rates. When you assume the mortgage, you are solely responsible for making all the payments, and your ex-spouse is released from their obligations.

Divorce and refinancing

When deciding between mortgage assumption vs. refinance in divorce, the simplest option is to refinance the loan. Refinancing your existing mortgage immediately removes your ex-spouse from the mortgage, and you don’t need a bank’s permission to put the home solely in your name. A refinance also allows you to update your loan terms. 

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For homeowners with a below-market interest rate, refinancing their existing mortgage is a tough decision. While it removes their existing spouse from the loan, it means giving up a low interest rate. The bright side is that a refinance allows them to stretch out their payments over a new 30-year term, which can lower their monthly payments. Additionally, they may be eligible to pull cash out of their home equity to consolidate debt, make home improvements, or buy out their spouse.

Mortgage assumption vs. refinance after divorce: key considerations

Before choosing a mortgage assumption or a refinance after divorce, there are many factors you should consider. Here are a few key considerations as you evaluate your options:

Loan types

The loan type is a big consideration when assuming the loan. Most conventional loans issued today do not offer a loan assumption option. However, loans backed by the Federal government (FHA, VA, and USDA) are eligible.

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For borrowers without eligible loans, refinancing the mortgage, paying cash, offering alternative assets, or tapping your home equity are better choices for splitting marital assets for divorcing spouses. If you’re unsure about mortgage assumption in divorce, contact your lender.

Qualification

When you get divorced, not only are you losing a spouse, but you’re also losing your spouse’s paycheck and credit score. Without their income and credit history, you may have a harder time getting approved for a mortgage refinance.

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You may be able to lower the monthly payment by refinancing into another 30-year mortgage, but higher mortgage rates could impact those savings. Additionally, you’ll reset the clock on interest payments, which could be more expensive over the long run. If income is a challenge, an option like Point’s Home Equity Investment may be a better choice.

How it impacts loan terms

Assuming the loan keeps the original mortgage terms intact. The interest rate, repayment term, and monthly payment do not change.

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When refinancing your original mortgage, you may get a higher interest rate or face an unfavorable amortization table. Consider refinancing into a similar term as the number of years left on your existing mortgage. For example, if you have 14 years left, select a mortgage term of 10 or 15 years.

Cost

The cost to refinance your original mortgage varies based on the loan amount. Generally, you'll pay between 2% to 5%. These costs include origination fees, points, title insurance, and appraisal. Some borrowers also pay points to lower their interest rates. On average, you’ll pay $4,000 to $10,000 to refinance an existing mortgage of $200,000.

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Assuming a mortgage doesn’t come with the same costs as a refinance, but most lenders do charge some fees. Plus, there are costs to put the home’s title in your name instead of being jointly owned with your ex-spouse. Overall, you’ll typically pay less when assuming a mortgage instead of doing a refinance.

Alternatives

If neither option sounds ideal, you don’t have to choose between mortgage assumption vs. refinance in divorce. Here are a few alternatives:

Equity buyout

One of the biggest assets a homeowner has is the equity in their home. Rather than selling or refinancing the home, you may choose to buy out your former spouse’s equity. Depending on your financial situation, this may involve cash, investments, or other assets.

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An equity buyout is ideal for a spouse who wants to stay in the home but may not qualify for a new mortgage. To determine the buyout amount, get an independent appraisal of the home’s value, then subtract mortgages, liens, and estimated closing costs.

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After splitting the home’s net equity, do an equity buyout by paying cash or transferring assets of equal value. If you don’t have enough money to pay for the equity buyout, a home equity investment (HEI) can provide the necessary cash without adding another monthly payment to your budget.

Home sale

During a divorce, many couples decide that neither spouse wants to remain in a home with so many shared memories. In this scenario, a home sale is the best option for splitting the equity.

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The downside is that the home may not sell right away or may need work before listing. Selling a home can also eat into your home’s equity when paying for selling costs, concessions, and realtor fees. However, this can be a wise choice to get a fresh start after divorce. Selling eliminates costly mortgage payments on a home that may be too big for a single person.

Co-ownership

In a down market, divorcing couples may determine that co-ownership is the best choice rather than selling at a low price. While it can lead to awkward situations, it is also a smart option for co-parenting. Co-ownership allows parents to avoid disturbing their children’s daily schedule.

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If you choose this route, it is important to set ground rules for how the household will operate and how the existing mortgage and other bills will be paid. Extra effort at the start will minimize problems in the future when it comes to money, family, and other situations.

FAQs

Is it better to assume a mortgage or refinance?

The decision between mortgage assumption vs. refinance after divorce is a personal choice based on your financial situation. Mortgage assumption saves money on refinance costs and keeps a low interest rate on the original loan intact. Refinancing removes a divorced couple from a joint financing obligation, and can provide cash for an equity buyout. 

How hard is it to assume a mortgage after divorce?

Assuming a mortgage after divorce is quite challenging if the loan is not backed by the Federal government. Unless you have an FHA, VA, or USDA loan, it is unlikely that your mortgage is assumable. If your original loan is eligible, the lender will examine your income and creditworthiness to ensure you can make the ongoing monthly payments. Borrowers with lower credit scores or a high debt-to-income ratio may not be able to qualify for a mortgage assumption.

What are the disadvantages of assuming a mortgage?

Assuming a mortgage can be a wise move, but there are disadvantages divorced couples need to be aware of. The spouse who assumes the loan will inherit the loan terms of the existing mortgage. They will be fully responsible for making all of the monthly payments. The other spouse will no longer be financially responsible for the loan.

Can I remove my ex-spouse from my mortgage without refinancing?

Unless your mortgage is assumable, the answer is no. The mortgage company underwrote the loan based on both borrowers' incomes and credit scores. If one borrower were removed from the loan, payback of the existing mortgage is less certain. This increases the risk to the lender. The best way to remove a spouse is to refinance the loan in only one spouse's name.

Final thoughts

Going through a divorce is a challenging situation for any couple. Many homeowners have to choose between mortgage assumption vs. refinance after divorce to separate their finances. Mortgage assumption allows the borrower to retain the existing mortgage loan terms. By comparison, a refinance creates a new loan only in one spouse's name. Since divorcing spouses often have reduced income, many look to sell their homes or stay co-owners of the property. If they want to access cash without selling or adding a new monthly payment, a home equity investment may be a smart choice.

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