Mortgage interest rates have significantly increased since the beginning of 2022, which is driving interest in loan assumptions for divorcing homeowners.
In January 2022, the average 30-year fixed mortgage rate was around 3.25%. By mid-January, rates began to climb, and by the end of 2022, the average 30-year fixed rate was 5.26%. As of January 12, 2023, the average 30-year fixed rate was 6.33%, almost double from the previous year.
The Impact of Rising Mortgage Interest Rates on Payments
Consider a $300,000 mortgage loan:
- 30-Year Fixed Rate at 3.25%: Principal & Interest Payment of $1,306
- 30-Year Fixed Rate at 6.33%: Principal & Interest Payment of $1,863
This results in a payment shock of $557. For divorcing homeowners, the primary concern is often cash flow, especially since household income may be significantly reduced. A payment shock like this can be very disheartening.
What is a Loan Assumption?
A loan assumption allows a buyer to take over a seller's existing mortgage. The purchaser becomes responsible for the remaining balance of the mortgage loan. This process is known as "mortgage assumption."
Types of Loan Assumptions
- Legal Transfer Assumption (Simple Assumption):
- You assume legal responsibility for paying an existing mortgage.
- The original mortgagee becomes secondary, similar to a co-signer.
- Qualified Assumption (By Novation):
- You assume responsibility for both the payments and the terms of the mortgage loan.
- A full release of liability for the original mortgagee may be obtained.
Note: If an equity buy-out of the vacating spouse's ownership equity is needed, you cannot access any equity in the loan through a loan assumption. You would need to equalize the equity elsewhere on the marital balance sheet.
Is Your Loan Assumable?
Whether a loan is assumable depends on the loan type and whether the current lender and documents allow for an assumption. The key lies within the mortgage instruments, such as the mortgage note or the deed of trust, particularly the Alienation Clause, also known as the Acceleration or Due-On-Sale Clause.
Typical verbiage includes:
"If all or any part of the Property or any Interest in the Property is sold or transferred without Lender's prior written consent, Lender may require immediate payment in full of all sums secured by this Security Instrument. However, Lender will not exercise this option if such exercise is prohibited by Applicable Law."
What is a Legal Transfer Assumption?
A lender cannot accelerate the due-on-sale clause if the property transfer is an exempt transfer, such as in the case of death or divorce. However, an exempt transfer in divorce does not release the original mortgagee from their legal liability to the existing lender should payment not be made.
To learn more about Legal Transfer Assumptions and Qualified Assumptions, where there is a true release of liability, watch our recent webinar on Loan Assumptions Incident to Divorce at Loan Assumption Webinar.
Get Professional Help
If you are a divorce professional and would like to discuss integrating divorce mortgage planning into your practice, search our directory to find a qualified CDLP® in your area at Divorce Lending Association.
Are you a mortgage professional who wants to incorporate divorce mortgage planning into your practice? Visit Get CDLP Certified.
The background knowledge of each team member brings value, different perspectives, and better solutions. Be part of the solution – get CDLP® certified.
This is for informational purposes only and not to provide legal or tax advice. You should contact an attorney or tax professional to obtain legal and tax advice. Interest rates and fees are only estimates provided for informational purposes and are subject to market changes. This is not a commitment to lend. Rates change daily – call for current quotations.
Copyright 2023—All Rights Divorce Lending Association
