The equity in the marital home can be the largest asset in a marriage. Often, one spouse will want to keep the home. Whether you should keep the marital home is the subject of another article.
But assuming that keeping the home is the right decision, typically, both spouses are on the mortgage and one spouse will need to be taken off. Additionally, equity in the home might need to be used to equalize the division of marital assets and equity in the home is often the only source of cash to do that.
The first thing I tell my clients when it appears that the home will have to be refinanced is to see a mortgage specialist as soon as possible, preferably a Certified Divorce Lending Professional (CDFL) such as Suzanne Söderberg. "http://www.suzannesoderberg.com/ A CDFL can help with the nuances often missed by other lending professionals. Divorce causes complications when it comes to qualifying for a loan, and particularly for a spouse who is dependent on spousal support, it can take some time to qualify.
Recently I learned that it is financially smarter to obtain an “equity buyout” loan vs a “cash-out refinance” loan. If there is a Certified Divorce Real Estate Specialist in your area, I would recommend seeking him/her out because apparently “equity buyout” loans are not widely known. The interest rate for an equity buyout loan is lower that the interest rate on cash-out refinance loans.
In order for any cash equity taken from the marital home to be considered as an equity buyout due to divorce, the amount of home equity in the marital home needs to be specifically addressed within the “Marital Residence” section of the marital settlement agreement. The marital property will need to be appraised as of the date the marriage is considered concluded (the date of separation in North Carolina) to determine the equity as of that date. Failure to address the equity buyout within that section disqualifies the equity withdrawal as an equity buyout and the refinance will be treated as a cash-out refinance in the eyes of Fannie Mae and Freddie Mac.
The closing costs and financing cost of the “equity buyout” refinance mortgage will be rolled into the amount of the new loan. The spouse/co-owner will receive buyout proceeds from the mortgage company equal to his/her equity in the property. The loan proceeds may also be used to pay the balance of the original mortgage and any other liens against the property. Under the mortgage buyout program, the spouse keeping and refinancing the home mortgage will not receive any proceeds from the loan.
A cash-out refinance loan is a loan that refinances your first mortgage into a larger mortgage, and allows you to take the difference in cash.
Whether you enter into an “equity buyout” or a “cash-out refinance” loan to tap your home equity, you enter into a whole new loan agreement. This means the terms, rate and repayment plan for your new mortgage will be different.