With mortgage rates on 30-year, fixed-rate loans rising over 6%, the cost of mortgages is significantly higher, making it more difficult for divorcing homeowners to refinance the marital home or buy a new one.
Divorcing homeowners who are now faced with refinancing their current mortgage most likely have a current interest rate at or below 4%. However, due to the recent increases, they are looking at interest rates in the 6% to 7% range. In a normal situation, nobody wants to refinance from a great rate to a higher one. On the other hand, divorced homeowners may have little choice but to refinance to retain the marital home or buy a new home post-divorce.
What is the real impact of rising rates, and how is it affecting affordability post-divorce?
Qualifying for a New Mortgage May Be More Difficult
Higher monthly payments are likely to make it harder for homeowners to qualify for a new mortgage they may have easily afforded before recent increases in mortgage interest rates, even if the mortgage balance doesn’t increase. A higher monthly payment will affect a borrower’s debt-to-income ratio (DTI).
For example, during the divorce negotiations, the couple agreed that John would pay Jane monthly spousal support of $4,000 for Jane to be able to refinance the existing mortgage on the marital home. For this scenario, Jane has no other current monthly debt obligations, and the max DTI allowed for mortgage qualification purposes is 36%.
Interest Rate on 30-Year Fixed Loan
Monthly Principal & Interest Payment
Note: The above table is principal and interest only. Taxes and insurance would also need to be added to the final mortgage payment. In addition, this table reflects a sample loan balance only and is not indicative of credit score, loan to value, and other factors that may come into play.
Not only did Jane’s monthly payment increase by $451.52, but her debt to income ratio increased by 11%, putting her at risk of no longer qualifying for a mortgage. When the divorce settlement also includes an equity buy-out of the marital home, the mortgage balance increases, which only adds to the increase in the monthly payment.
What is the bigger issue?
Cash flow is a priority concern for newly divorced homeowners as previous income sources are now reduced and will support two households instead of only one. When the monthly payment after refinancing the current mortgage increases, looking for other ways of improving cash flow becomes an even bigger priority.
When incorporating divorce mortgage planning into the divorce process, a Certified Divorce Lending Professional (CDLP™) will work directly with the divorce team and divorcing homeowners to strategically identify opportunities to improve cash flow to make retaining the marital home more affordable. In addition, a CDLP™ can help identify additional income sources and the strategic assignment of debt obligations helping both spouses to be in a better position for mortgage financing.
How are you incorporating Divorce Mortgage Planning into negotiating and settling your divorce cases where real property is involved? Divorce Mortgage Planning can help divorcing homeowners get from where they are now to where they want to be by exploring and evaluating their strategic opportunities.
Certified Divorce Lending Professionals are strategic and creative thinkers who can provide clarity and value in helping divorcing homeowners make more informed decisions regarding their home equity solutions and divorce mortgage planning strategies.
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.