Choosing Between Mortgage Assumption Vs. a Refinance After a Divorce

Things can get messy when a married couple split up. That’s especially true when homeownership and real estate are involved.

Unless both parties agree to stay on the loan or sell the home, one spouse will probably need to buy out the other in the form of a refinance or a loan assumption.

Trust this handy article to help guide you through a mortgage assumption vs. refinance after divorce, including the pros and cons of each option.

Refinancing to Sole Ownership of the House

Julia Rueschemeyer, a divorce mediation attorney, explains that houses are awkward assets because they can’t be “sawn in half,” and one spouse often lacks enough cash or other assets to buy the other spouse out. “Also, houses have practical and emotional significance beyond their value, so the spouse that remains in the home might seem to have ‘won’ in the divorce.”

Often, divorcing couples agree to have one spouse remain in the home. The cleanest way to make this transition is to refinance the existing mortgage, removing the other party from the loan.

Here, a refi effectively acts as a new loan for the single homeowner, paying off the old mortgage loan and completely resetting the rate and terms.

But therein lies the rub, as mortgage rates in the current market could be a lot higher than the rate for the existing mortgage loan, resulting in higher monthly payments and more total interest paid over the life of the new loan. Plus, a mortgage refinance requires paying closing costs, which can equate to 2% to 5% of the loan amount.

“However, if rates have fallen since the original loan was taken out, you could pay a lot less over the life of that new loan,” says Dennis Shirshikov, a finance professor at City University of New York/Queens College.

Keep in mind that refinance applications require applicants to list their current marital status.

For couples who have not yet filed for divorce, the borrower party can list himself or herself as married and later go through the process of changing that status, according to Shelby McDaniels, managing director of Specialty Sales and Business Development for Chase Home Lending.

“For those who have already filed for divorce, they’ll need to report as ‘separated’ on the refinance loan application and undergo additional paperwork,” he says. “The spouse planning to maintain full ownership of the property will also need written consent from the other party who intends to be removed from the loan or bought out detailing the agreement. This process is typically finalized during the divorce proceedings, which can take time.”

Once a refinance is complete, a quit-claim deed is required to remove a spouse from the title, per McDaniels. “This is a simple process to complete the transfer of ownership for the property.”

An Example of Refinancing Into a Different Market

Let’s say you originally took out a 30-year mortgage loan for $250,000 at a fixed 3.75% rate. Your monthly payment to date would be about $1,158. But if, after six years of payments, you choose to get divorced, the remaining balance on the mortgage would be $219,650.

“If you decide to keep the home and refinance the $219,650 today for a new 30-year mortgage at a 6.25% fixed rate, your new monthly payment would be $1,352 – an increase of $196 per month,” cautions Rueschemeyer.

You’d also pay thousands more in total interest over the life of the loan, plus tack on 30 years to your repayment schedule versus the 24 years remaining on the old loan.

Assuming the Loan to Keep Your Existing Rate

But what if you don’t want to start over with a costlier new loan, or you don’t qualify for a mortgage refinance? The good news is that you may be able to assume your existing mortgage loan.

“To assume a mortgage, you take over the existing loan unchanged, except that the other spouse is taken off the mortgage. Here, you can avoid refinancing costs and keep the same interest rate. However, you are locked into the original terms, even if rates drop,” notes Scott Beloian, owner/broker with Westcoe Realtors in Riverside, California.

Assuming a mortgage may be the ideal solution here, especially if you want to save money and simplify the house transition.

“However, not all mortgages can be assumed. It depends on the loan program and lender and what they allow,” cautions Holly J. Moore, a divorce attorney in Corona, California.

To assume a mortgage, the spouse who wishes to take over the loan must meet the lender’s qualifications. This typically involves proving they have the earnings and creditworthiness to continue making payments.

“The process often involves submitting financial documents, similar to when the original loan was obtained,” Shirshikov continues.

What loans are assumable?

Again, not every type of loan is assumable. Only government-backed loans fit this criteria, which means an FHA, VA, or USDA mortgage loan is assumable. But they only represent about 20% of outstanding home loans.

The vast majority of mortgages are conventional loans, which cannot be assumed by another party, nor can jumbo loans. Some conventional loans might include assumption clauses for specific situations, like the death of a spouse, but divorce usually doesn’t qualify.

If your mortgage is non-assumable, you can’t skirt around this rule by attempting to sell your portion of the property to the other spouse. That’s because non-assumable mortgages have a due-on-sale clause: a provision in a mortgage agreement that mandates the borrower must repay the loan to the lender in full if the property is sold.

However, a due-on-sale clause does not obstruct property transfers due to divorce, separation, or inheritance.

Pros and Cons of a Refinance When Divorcing

Let’s take a closer look at the advantages and disadvantages of attempting to refinance your mortgage loan so that you can remain in your home during or after a divorce:

Pros of Refinancing	Cons of Refinancing
You can remain in the home and own it by yourself, especially if your current loan is non-assumable.	Your monthly payments could increase dramatically, especially if you refinance at a higher interest rate than your current rate.
You may secure a lower interest rate and better terms, possibly decreasing your monthly payments and overall interest paid (depending on your term).	You’ll pay closing costs that could equate to 2% to 5% of your loan amount.
The process could take less time (30-45 days) than assuming a mortgage (45 to 90 days).	You will likely extend your loan term and pay more in total interest over the life of the loan.
	You may not qualify unless you have a favorable credit score, credit history, debt-to-income ratio, and sufficient income.

Shirshikov notes that the main benefit to refinancing is potentially securing a lower interest rate, “especially if rates have fallen since the original loan was taken out. Another benefit is removing the other spouse from any financial responsibility,” he says. “However, refinancing incurs costs such as closing fees and might result in a higher interest rate if market conditions have worsened. Additionally, the new loan might require a longer-term, increasing overall interest costs.”

The party planning to keep the home “must ensure they can afford the mortgage with just their income. Those looking to refinance should also ensure they can qualify for the loan based on their credit and equity,” points out McDaniels.

Pros and Cons of a Loan Assumption When Divorcing

Assuming a mortgage has its pluses and minuses as well. Here’s a handy breakdown:

Pros of Loan Assumption	Cons of Loan Assumption
You can remain in the home and own it by yourself, especially if you don’t qualify for or can’t afford a mortgage refinance.	Only government-backed mortgages (FHA loans, VA loans, or USDA loans) can be assumed; conventional and jumbo loans cannot.
You can keep the existing loan rate, which could be lower than today’s refinance rates, saving you money.	You will likely have to buy out the other spouse’s equity.
You won’t have to reset to a longer term, enabling you to repay the loan more quickly than if you refinanced.	You’ll likely pay a mortgage assumption fee (0% to 1.0% of the loan amount) plus closing costs (often less than what is charged for a refi).
You won’t pay the typically higher closing costs (2% to 5%) associated with a mortgage refinance.	The process could take more time (45 to 90 days) versus a refinance (30-45 days).

“The main advantage of assuming a mortgage is the ability to keep the existing loan terms, potentially saving money if the interest rate is favorable,” explains Shirshikov. “However, a significant downside is that the spouse assuming the mortgage must often buy out the other spouse’s equity, which might require substantial cash or additional financing.”

Also, Rueschemeyer cautions, “In my experience, the biggest variable here is the bank – does the lender handling the mortgage allow assumption of the note?”

Alternatives to Consider

Assuming a mortgage or refinancing your original mortgage loan are your only options during or after a divorce. Alternatively, consider selling the home and dividing the proceeds, which can benefit both parties with a fresh financial start.

“Or, think about renting out the home, which can generate income – especially if the property has appreciated in value or is located in a high-demand area,” suggests Shirshikov. “However, this option also involves the complexities of managing a rental property, including maintenance and tenant relations, which might not be desirable in the emotionally charged aftermath of a divorce.”

Rueschemeyer outlines another possible path.

“A couple can also write into their divorce agreement that one spouse can remain in the house for a certain number of years, such as until children graduate from high school – without taking the other spouse off the deed or mortgage,” she says. “This can allow a spouse to keep the house with children even when they don’t have enough money to buy out the other spouse at the time of divorce or enough income to refinance the house into their name.”

In this scenario, a couple could delay the buyout for a few years, after which time the spouse who stays in the home might have enough money to buy out the other spouse’s equity; or, they could create a payment plan for one spouse to buy out the other.

The Bottom Line

Breaking up, as they say, is hard to do, particularly when real estate and a mortgage is involved. Fortunately, there are viable options that can often result in a win-win for both divorcing parties, including refinancing the mortgage, assuming the mortgage loan, selling the home and splitting up the proceeds, or making other arrangements.

“It’s a good idea to consult closely with a trusted lawyer before making this decision,” Moore advises. “Making responsible preparations for all possible outcomes can assist you in making morally and legally good decisions.”