Okay, so we all know that mortgage interest rates have gone up significantly since the beginning of 2022. And, that is probably one of the main driving factors for the interest in loan assumptions for divorcing homeowners.
January 2022 started with the average 30-year fixed mortgage rate just around 3.25%. Mid January, we started on the increase and rounded out 2022 with an overall average 30-year fixed rate of 5.26%. As of January 12, 2023, the average 30-year fixed rate was at 6.33% - almost double this time last year.
What exactly is the effect of rising mortgage interest rates on the mortgage payment?
Take an existing mortgage loan amount of $300,000.
- 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
That's a payment shock of $557. I have found when working with divorcing homeowners that their primary concern in divorce may not necessarily be the interest rate but rather cash flow given a significant amount of their household income may now be gone. So obviously, a payment shock like this is going to be very disheartening.
What is a Loan Assumption?
An assumable mortgage is a type of mortgage loan that can be transferred by a seller and "assumed" by the purchaser of the parcel of property to which the mortgage is attached. When this occurs, the purchaser will become responsible for paying off the remaining balance of the mortgage loan. The act of assuming the terms of the mortgage is known as, "mortgage assumption."
Two types of loan assumptions.
Legal Transfer Assumption or Simple Assumption:
- You assume legal responsibility for paying an existing mortgage.
- Original mortgagee is now in a secondary position to pay off the loan, silimar to a co-signer.
Qualified Assumption or 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 you are going to need to do an equity buy-out of the vacating spouse's ownership equity, you will not be able to access any equity in the loan if seeking a loan assumption. You would need to equalize the equity elsewhere on the marital balance sheet.
Is Your Loan Assumable?
It depends on the loan type and whether or not the current lender and documents will allow for an assumption. The answer to this question lies within the mortgage instruments - either the mortgage note or the deed of trust.
Within the documents you will find what is called the Alienation Clause a/k/a Acceleration or Due-On-Sale Clause.
The typical verbiage is as such:
"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 making the transfer exempt from the Alienation Clause?
A lender cannot accelerate the due-on-sale clause if the transfer of property is an exempt transfer as in death or divorce.
An exempt transfer such as in divorce; however, does not release the original mortgagee from their legal liability to the existing lender should payment not be made.
To find out more about a Legal Transfer Assumption as well as a Qualified Assumption where there is a true release of liability, please watch our recent webinar on Loan Assumptions Incident to Divorce at https://cdlp.divorcelendingassociation.com/divorce-literacy-replay-loan-assumption
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 www.DivorceLendingAssociation.com.
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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.
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