With mortgage rates on 30-year fixed-rate loans rising above 6%, the cost of mortgages has significantly increased, making it more challenging for divorcing homeowners to refinance the marital home or purchase a new one.
The Current Challenge for Divorcing Homeowners
Divorcing homeowners now facing the need to refinance their current mortgage likely have an existing interest rate at or below 4%. However, due to recent increases, they are now looking at interest rates in the 6% to 7% range. Typically, no one wants to refinance from a lower rate to a higher one, but divorcing homeowners may have little choice if they wish to retain the marital home or buy a new home post-divorce.
The Real Impact of Rising Rates on Affordability Post-Divorce
Qualifying for a New Mortgage Is More Difficult
Higher monthly payments make it harder for homeowners to qualify for a new mortgage they might have easily afforded before the recent rate increases. Even if the mortgage balance doesn’t increase, the higher monthly payment affects a borrower’s debt-to-income ratio (DTI).
For example, consider a scenario where, during divorce negotiations, John agrees to pay Jane monthly spousal support of $4,000 so Jane can refinance the existing mortgage on the marital home. Jane has no other current monthly debt obligations, and the max DTI allowed for mortgage qualification purposes is 36%.
| Mortgage Balance | Interest Rate on 30-Year Fixed Loan | Monthly Principal & Interest Payment | Debt-to-Income Ratio |
|---|---|---|---|
| $300,000 | 3.500% | $1,347.13 | 34% |
| $300,000 | 6.000% | $1,798.65 | 45% |
Note: The above table reflects principal and interest only. Taxes and insurance would also need to be added to the final mortgage payment. This table represents a sample loan balance and does not account for credit score, loan-to-value, and other factors.
Not only did Jane’s monthly payment increase by $451.52, but her DTI ratio also increased by 11%, putting her at risk of no longer qualifying for a mortgage. When the divorce settlement includes an equity buy-out of the marital home, the mortgage balance increases, adding to the monthly payment burden.
The Bigger Issue: Cash Flow Management
Cash flow is a priority for newly divorced homeowners as previous income sources now need to support two households instead of one. When refinancing the current mortgage results in higher monthly payments, finding ways to improve cash flow becomes even more critical.
The Role of Divorce Mortgage Planning
Incorporating divorce mortgage planning into the divorce process can make a significant difference. A Certified Divorce Lending Professional (CDLP®) works directly with the divorce team and divorcing homeowners to identify strategic opportunities to improve cash flow, making it more affordable to retain the marital home. Additionally, a CDLP® can help identify additional income sources and strategically assign debt obligations, positioning both spouses better for mortgage financing.
Incorporating Divorce Mortgage Planning in Divorce Settlements
How are you incorporating Divorce Mortgage Planning into negotiating and settling your divorce cases involving real property? Divorce Mortgage Planning helps divorcing homeowners transition from their current situation to their desired future by exploring and evaluating strategic opportunities.
Benefits of Working with a Certified Divorce Lending Professional (CDLP®)
Certified Divorce Lending Professionals are strategic and creative thinkers who provide clarity and value, helping divorcing homeowners make informed decisions regarding their home equity solutions and divorce mortgage planning strategies.
Contact a CDLP® Today
For expert advice and personalized solutions, consider working with a Certified Divorce Lending Professional. They can help you navigate the complexities of divorce mortgage planning and ensure you make the best decisions for your financial future.
Disclaimer
This information is for informational purposes only and not intended as legal or tax advice. Please consult an attorney or tax professional for specific guidance. Interest rates and fees are estimates and subject to market changes. This is not a commitment to lend. Rates change daily—please call for current quotations.
This is for informational purposes only and not for the purpose of providing legal or tax advice. You should contact an attorney or tax professional to obtain legal and tax advice. Interest rates and fees are estimates provided for informational purposes only, and are subject to market changes. This is not a commitment to lend. Rates change daily - call for current quotations. The information contained in this newsletter has been prepared by, or purchased from, an independent third party and is distributed for consumer education purposes.
