Is It Time to Re-think Mortgage Refinance on Divorce?
For the entirety of this lawyer’s career, it was universally accepted that if one spouse was going to keep the marital residence, that property needed to be refinanced so that the spouse passing title (i.e., moving on) was no longer on the promissory note for the mortgage. The reasons were simple. If my spouse and I were on the note and mortgage together and I just give her title in the divorce settlement, IF she defaults, the mortgage company is still going to sue me for breach of the promissory note and my spouse’s agreement to indemnify me is not a defense. Thus, I need to be released from the note as part of divorce.
Well, maybe …… So, you and the missus hooked a 3.5% thirty year mortgage in 2018. Sadly, the marriage is not so favorable in 2023. You have 25 years left on the $300,000 mortgage (you bought cheap compared to now) and it’s just a few cents over $1,300 a month for the principal and interest. Today when your spouse goes to refinance so that you are off the mortgage, the mortgage banker will greet him/her with open arms. The same mortgage today is $2,300 a month; a thousand a month more to stay in the same joint.
That may not be possible to swing in a world where there is only one income on the application plus any meager child support you are paying. That means a move to smaller digs and a mortgage that will still be higher than what you were paying on the “nice” house before you moved out. If your ex- decides to tough it out, the cost over the lifetime of the mortgage will be 240 months x $1,000 a month extra for the refinance to an 8.5% mortgage or; ouch; a quarter million dollars. Not a cent of that will enhance lifestyle and $240,000 could buy a lot of retirement or even some money for kids in college if it wasn’t sent to your friendly lender.
In 1971 Clint Eastwood uttered the perfect line for where I am going next; “Do you feel lucky, punk?” If you forego the sensible route and not refinance, it may be possible for your spouse and/or the kiddies to say in the “nice” house. In so doing their expenses are $1,000 a month less than they might be. That might be a reason for your child support or alimony or equitable distribution to be “adjusted.” In Italian we need to offer the word Coda. Read the first para of the blog again. If the in the house spouse goes South on the mortgage, you will be sued and you will be liable and your credit record will be blemished. All bad. But, aside from that nastiness, if you bought a house in 2018 you have seen a lot of appreciation. My neighbors who bought their house in 2018 for $355,000 just saw the same house two doors away sell last month for $550,000. If you are in a similar straight you have $200,000 in home equity before we consider the fact that you have been paying principal for five years. So, your credit might be dinged but the likelihood that a bank makes you come out of pocket in a foreclosure is pretty small. Meanwhile the savings are a grand a month and a quarter mill over the life of the remaining mortgage.
So, punk, you might be lucky if you don’t demand the refinance any court would otherwise feel compelled to order in a judicial resolution. But you can’t be stupid either. Your property agreement needs to have some tough penalties if the spouse you left in the house doesn’t pay. Thoughts that come to mind are that if the mortgage goes into default, the house is instantly put on the market and sold by an independent individual (e.g., realtor) who has a power of attorney to act. If your credit rating is dinged because of the default, you probably should get compensation for that because your lenders aren’t going to forego the chance to take your credit card or other interest from 18 to 25 percent because you defaulted on the mortgage. That penalty needs to be substantial enough that your ex does everything possible to avoid the initiation of a foreclosure action. It also makes sense to have your lawyer have a look at your note and mortgage on the existing “nicehaus.” Typically, these documents contain a due on sale clause. How that clause is worded could affect the viability of any plan to retain joint indebtedness. I also suspect that mortgage lenders may soon be combing their files looking for a basis to declare a default so that they can demand that the existing loan (at 3%) be re-negotiated.
We are living in strange times and strange is the new normal in a world where this writer borrowed $100,000 at almost 14% to buy a house in 1983 yet saw the new neighbors across the street get a mortgage at three percent 35 years later.
