It’s hard to forget the housing frenzy that quickly took shape when mortgage interest rates hit historic lows in 2021. Many couples took advantage of this unique opportunity and either bought a new home or refinanced an existing home loan. Now, these ultra-low rates are posing new challenges to spouses who are getting a divorce.
Despite the Federal Reserve cutting interest rates twice this year, mortgage rates remain elevated. As such, one of the challenges divorcing couples are currently facing is losing out on a once-in-a-lifetime interest rate and paying significantly more for a new or refinanced home loan. Some ex-spouses have gone so far as to continue co-owning the home until certain family milestones are reached — such as their children graduating from high school — or continue living under the same roof to maintain an affordable monthly living expense during the divorce (and, in unique cases, even after).
While those are extreme cases, I often see changing economic conditions and concerns over high interest rates play a role in resolving divorce cases. If you’re going through a divorce and are worried about who gets custody of the low mortgage rate, as well as how fluctuating interest rates might affect the division of other assets like debt, business valuations and investments, here are some things to consider to make the process smoother.
Get Your Finances in Order
For better or for worse, finances impact virtually every aspect of a divorce case — from living arrangements to parenting time to future stability. That’s why it’s critical to first determine the full value of your marital estate.
Each spouse should begin by filling out a statewide Financial Affidavit form and disclosing their income, assets and expenses. The lawyers will use these financial disclosures to create an initial balance sheet of the marital and non-marital assets and liabilities, which they will use to evaluate options for dividing the marital estate and liabilities.
Finalizing a balance sheet of assets and liabilities can be simple or complicated depending on what you have, and fluctuating interest rates can oftentimes add an additional layer of complexity to valuing and dividing assets. For example, higher interest rates can decrease property values while lower rates can boost them. Rising rates can also increase the burden of shared debt from credit cards or car loans. It is important to work with an experienced attorney along with a team of qualified financial professionals who can help you understand and navigate how your assets will be appraised and divided in relation to current interest rate trends, which could ultimately affect the financial outcome of your case.
Set Your Goals and Expectations
Once you’re fully informed of your finances and market implications, the next step is to set your goals and expectations. The circumstances and facts of each divorce are different, so know that the outcome of your divorce case will not be the same as your friend, relative, acquaintance, etc.
It is extremely important to be honest and upfront with your lawyer about your ultimate financial goals and make sure they understand what is most important to you. That way your lawyer can try to get you what you want most under the parameters of the law.
Consider All Options
Once you have your goals and finances aligned, do a cost-benefit analysis of all your options. This means not only weighing the gains and losses of retaining or dividing certain assets but also assigning values to intangible factors like emotional well-being and lifestyle flexibility.
Take, for instance, couples who secured a low-interest rate mortgage a few years ago. Usually, the spouse who keeps the house also gets to keep the low mortgage rate, if that spouse’s name is on the mortgage and/or the lender allows the spouse retaining the residence to “assume” the mortgage. However, not all spouses can afford to “buy out” the other spouse’s interest in the house, even if they get to keep the low mortgage rate. A spouse’s financial ability to retain the house will depend on the value of the other assets in the estate and if there are sufficient assets to make the other spouse “whole.” There are also other aspects to consider such as the emotional attachment to the home or achieving more freedom to downsize or upsize living arrangements.
By evaluating the advantages and disadvantages of each option, you can make a more well-informed decision that aligns with your goals. A savvy lawyer will help you create a holistic plan based on the facts of your situation and objectives. Case in point — there may be a way to structure a financial settlement that enables you to keep your house and the mortgage rate. Sometimes you can negotiate having a spouse stay on the current mortgage for a period of time in exchange for another asset or concession in the case. Your attorney and a mortgage broker can guide you through this process.
With the right professional guidance, divorcing couples can achieve a financially sound and fair settlement that accounts for their wants, needs and the evolving economic environment.