Is there a direct impact when implementing divorce mortgage planning into the divorce settlement process? Yes. Let me explain.
Misconceptions About Equity Buy-Outs
Many professionals mistakenly use the term "equity buy-out" as if it refers directly to a type of mortgage loan. In reality, an equity buy-out is not a mortgage loan but a process of acquiring another party's interest in a jointly owned home. This can be achieved by equalizing other marital assets or obtaining new mortgage financing to access the equity needed for the buy-out.
The Problem with Settlement Agreements
A divorce settlement agreement may detail the terms of the equity agreement, but it cannot dictate what type of mortgage financing will be available. The options available often depend more on the specifics of the property rather than the borrowing spouse's credit and income. Additionally, the settlement agreement itself may directly impact the ability to access the equity in the real property.
Understanding Mortgage Refinance Types
There are two types of mortgage refinance: Rate and Term, and Cash-Out. The primary difference between the two is access to equity. A Rate and Term refinance can allow access up to 95% of the home's value, whereas a Cash-Out refinance limits access to 80%.
For instance, if the marital home is appraised at $600,000 and a Cash-Out refinance is the only option, you can only borrow up to $480,000. However, with a Rate and Term refinance, you could borrow up to $570,000, a significant difference of $90,000 in equity.
Real-World Example
Consider Jane, who is retaining the marital home valued at $600,000 with an existing mortgage of $400,000. The equity in the property is $200,000, to be divided equally between Jane and John. If the refinance is categorized as a Cash-Out refinance, Jane could only borrow up to $480,000 and, after paying off the existing mortgage, would be short $20,000 to complete the equity buy-out.
Triggers for Cash-Out Refinance
Two common triggers for a refinance to be categorized as a Cash-Out are:
- Ownership and Title Vesting Limitations: The manner in which the property title is held can impact the refinancing options.
- Commingling Equity Buy-Out with Debt Payments: Including other debts, such as attorney fees, in the refinancing can also trigger a Cash-Out refinance.
The Role of Divorce Mortgage Planning
Implementing divorce mortgage planning into the settlement process can profoundly impact the outcome. Certified Divorce Lending Professionals (CDLP®) work directly with you and the divorcing homeowners to identify conflicts between the property, outstanding mortgages, and the marital settlement agreement. This helps position the borrowing spouse to obtain the best mortgage financing options available.
The Role of a Certified Divorce Lending Professional
A Certified Divorce Lending Professional does not provide tax or legal advice. Instead, they work directly with the divorce team to incorporate divorce mortgage planning into the overall process. They have a unique understanding of the intersection of family law, financial and tax planning, real property, and mortgage planning.
Integrating Divorce Mortgage Planning
How are you integrating divorce mortgage planning into your case management? Involving a Certified Divorce Lending Professional (CDLP®) early in the divorce settlement process can help set the stage for successful mortgage financing for divorcing homeowners.
Incorporate Divorce Mortgage Planning for Better Outcomes
By involving a CDLP® early in the settlement process, you can ensure collaborative problem-solving, leading to better outcomes for all parties involved.
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.
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