Real Estate

It’s a Tough Time for Divorcing Couples Who Jointly Own A Home

Higher mortgages rates can make refinancing for one spouse more expensive, making negotiations tougher.

By Nicole Friedman

When Ashley Worsham was getting a divorce last year, she wanted to continue living in the Sarasota, Fla., home she purchased in 2020 with her then-husband, Luke Giaccone.

But refinancing their current mortgage to take Mr. Giaccone off the loan would have raised her monthly payments by about $500 a month. “I noped out of that really fast,” she said.

Instead, the pair agreed to an arrangement in which Mr. Giaccone stayed on the mortgage, allowing Ms. Worsham to keep the 3% rate. Ms. Worsham is repaying Mr. Giaccone’s portion of the equity over 10 years. She rents out a room in the house on Airbnb to increase her income.

“It is a very nontraditional

situation,” Ms. Worsham said.

In past years, the most common way for divorcing couples to resolve the issue of a jointly owned home if one spouse wanted to continue living there was straightforward. One person could remove the other from the loan by refinancing the mortgage. Since borrowing rates had been low for years, getting a new loan was a relatively uncomplicated way to settle the matter.

The rapid increase in mortgage-interest rates over the past year has upended that approach. Today, the typical resolutions for joint homeownership are usually less appealing for at least one and sometimes both spouses, posing a new source of contention.

A divorcing couple could sell the home, but prices have been falling throughout much of the U.S. The couple could continue owning the property together, even after dissolving their marriage.

Or one spouse could take over full control. But transferring homeownership to a single person can require a refinance at the current interest rate. That means the spouse staying in the home could be stuck with significantly higher monthly mortgage payments.

“A lot of the homes I’m seeing right now have mortgages on them from a time when mortgage rates were a lot lower,” said Elena Karabatos, a divorce lawyer in New York. “There’s no question that this is an issue that’s making negotiations tougher.”

Most homeowners with mortgages have a current interest rate below 4%, according to mortgage-data firm Black Knight Inc. The average rate for a 30-year fixed mortgage was 6.28% in the week ended April 6, according to Freddie Mac.

Some couples have opted to take turns living in the house with the children until a refinancing or sale becomes more attractive, said Lisa Zeiderman, a divorce lawyer in New York.

“Especially if there’s kids involved, they’re just saying, ‘We’ve got to keep this loan, it doesn’t make any sense to refinance. We’ve got to wait until the rates come back down again,’” said Nicole

Rueth, a senior vice president at Movement Mortgage LLC based in Denver.

Selling the home can offer a clean break. But in many parts of the country, unloading a house due to a divorce could mean booking a loss if the couple bought the home recently. Home prices in some Western markets, such as San Francisco and Seattle, were down 10% or more in February from a year earlier, according to Black Knight.

Terry McLoughlin chose to remain in his house so his daughters could stay in the same schools.

Mortgageassumption, a process for transferring an existing mortgage to new ownership, has gotten renewed attention due to the increase in mortgage rates. Assumptions are typically not allowed for loans backed by Fannie Mae and Freddie Mac, but there are some exceptions including in cases of divorce, if the remaining spouse meets underwriting guidelines.

Some divorcing couples are trying to avoid these difficult choices by waiting out the market. In some cases, a divorce agreement could give the spouse who is staying in the home a year or longer to refinance, instead of requiring it shortly after the divorce is final, said Nancy Kaye, a certified divorce financial analyst.

In other cases, the departing spouse agrees to stay on the mortgage to avoid a refinance in exchange for other concessions.

But that approach can have downsides, too. A spouse who stays on a shared mortgage after a divorce might not be able to immediately qualify for another mortgage to buy a home somewhere else, said Gisela Juengling Brandt, a mortgage loan originator with U.S. Bank in Evanston, Ill. If the person who is responsible for the mortgage payment fails to pay, both people’s credit scores could be affected. Terry McLoughlin opted to remain in his house after his separation to enable his daughters to stay in the same schools. “It became really obvious that it was going to be really difficult to do so if I had to refinance,” he said.

Mr. McLoughlin’s ex agreed to stay on the mortgage to preserve their mortgage rate, which is less than 3%. When he eventually sells the house in Sterling, Va., he will repay his ex’s portion of the equity, plus appreciation.

“It’s a risk for both of us, obviously, because we’re kind of tied together financially,” Mr. McLoughlin said. But “it’s definitely a good thing, keeping the girls in the house.”