How Can We Refinance A Home Mortgage As Part of A Divorce?

Question

We are in the middle of getting divorced and one of our decisions is for one of us to keep the house. I am trying to figure out all the costs involved in that, but I need more information.

Is it true that in order to remove one spouse from the loan, we would be required to refinance? As is this type of refinance the same as a normal refi, with all the same fees and closing costs?

Also, we currently have a lot of credit card debt (partially from legal fees) at high interest rates. If we are forced to refinance, I am considering making it a Cash-Out Refinance and using the extra cash to pay off our higher interest credit cards, but I don't know if this type of refi has different fees. I would also like to know how to find out how much extra cash we would be able to get.

Another option is to get a home equity line of credit if that has much less fees than the cash-out refi...however, I don't know if that makes sense if we are already required to refinance in order to remove one of us from the mortgage. Again, I don't know how to figure out how much line of credit we can get. I have looked at calculators online and I enter our home value and our current loan balance but I don't know which LTV percent to enter.

Our home's value is about $255,000 and we currently owe $190,000.

Answer 1

You will probably have to get a new loan and pay off the old one. It depends on the policies of your lender.

Some lenders will allow the removal of a party on a mortgage, an action called an "assumption". Normally, assumptions are only granted when they are required to be available (such as on a VA loan) or when the remaining party has a very good credit and repayment record, which you do not since it looks like you are loaded down with credit card debt, plus the loan is new and you have paid relatively little of it. In this circumstance a lender will be unlikely to grant an assumption.

Cash Out Refinancing

When you apply for a mortgage or refinancing you can ask for more money than is needed to buy the property to get the difference in cash. Normally banks will not do a cash-out loan for more than 80% of the appraised value of the property. In your case, assuming that the bank-appraised value of the home is actually $255,000 as you say, then the maximum you could borrow from a normal bank would be $205,000 which would leave an extra $15,000 in cash beyond what you owe, minus the closing costs and other fees of, say, $2500, would result in a check of $12,500.

Of course, you can always go to a less reputable bank and pay more interest to increase your chances for a larger payout.