When people first reach out to me, they often say things like “We’ve been unhappy for years" or “We know we need a divorce, but we’ve been waiting for the kids to get older.” And my favorite, “I know I need a divorce, but I’m waiting for the right time.” My question is always “What is the right time?” The answer is that there is never an ideal time to get divorced.
People have an especially hard time taking that first step when the economy, interest rates, and the housing market are unstable. There will always be an excuse to stay in a comfortable (even if unhealthy) status quo. The fear of change is literally wired into our DNA, and it is only worse when that fear is reinforced by external factors like well-meaning friends, family, or even the news.
The good news is that there is a solution to every problem and ultimately the fear of the unknown is always worse than the reality. So if you are in a situation that needs to change because you know it’s not healthy for you, your kids, or your spouse, know that you are not stuck despite any external factors! With some reactive problem-solving and compassionate guidance, anyone can start moving towards their healthy new reality!
One of the things we hear the most about at Family Transitions is the fear of high-interest rates. All couples facing divorce are worried about their ability to purchase another home to become a two-household family. There are many things to consider when purchasing a new home and it is best to not get hung up on the interest rate itself:
Think Big Picture When Considering Your Assets Why is the big picture important? It’s critical for allowing you to think holistically about the settlement structure, rather than getting caught up on individual assets. Couples will want to decide on the total value that they want each spouse to receive, and work backwards from there to determine who gets what. Since higher mortgage interest rates make borrowing money more expensive for everyone, if you want to refinance your home to “buy out” your spouse, the interest rate will impact your post-divorce mortgage payment, and this might affect the amount of equity that you can afford to pull out of the house to pay the other spouse. That doesn’t matter though, if you think of asset distribution as a shell game, and you can substitute house equity (or a portion thereof) with something else (like more retirement money).
High-Interest Rates Bring Benefits Higher interest rates keep home prices from skyrocketing. If you are the spouse planning to move out, this may be an opportunity to get into the house you want before climbing prices make it unattainable. The best way to evaluate this is to speak to a mortgage expert. Most will offer a free consultation, and their analysis can be invaluable in helping you develop a plan and feel in control of your situation. Siobhan Merritt, owner of Merritt Mortgages with over 20 years of experience helping families find creative mortgage solutions, points out that “a good broker can always assist with lowering an interest rate, but the market dictates the ultimate value of the home or buyout amount. Looking at real number scenarios can be critical to getting clarity on what the best path forward might be.”
Interest Rates Are Temporary The experts don’t expect mortgage rates to start inching downward for many months, but the consensus is that rates won’t be settled down for as long as another two years. That is a long time to continue living in an unhealthy or toxic environment. If it’s in your interest to move forward now because it is time to change your unhealthy situation, refinancing can be done later, when rates come down.
Waiting May Cause Other Problems Home values increase over time, and for most couples, the home is the largest marital asset. This means that waiting for lower interest rates, can actually dramatically impact a future divorce settlement structure. Let’s pretend you stay in the home together for two more years to wait out the interest rates and during that time the home increases in value from $400k to $500k. If you are splitting equity 50/50, you now owe your spouse an additional $50k over what you would have owed if you got divorced today. This actually could make refinancing in the future more complicated, because you might not qualify to maintain a mortgage with that increased principal balance. If you are the spouse moving out, you will be facing higher housing prices as well. Even though you might be getting $50k more than if you got divorced right now, rising housing prices mean that the house you purchase now, and the house you can afford in two years, are roughly the same.
Here are some other creative ideas:
If one spouse is willing to rent for a year, or if their earnings would support a second home, you can determine the amount of the buy-out now, but delay the refinancing until a later date. Hopefully, the interest rates go down during that time, and in exchange for your spouse agreeing to delay their payment, you could add interest to the amount they are owed. An agreement like this, if properly written in the settlement agreement, is totally enforceable in court and both spouses are protected
One spouse could go through a “mortgage assumption.” Not all lenders allow this, but it is worth asking if yours does. If one spouse keeps the house, and all the equity (or the other spouse’s share of the equity gets paid from somewhere else), and they can assume the mortgage, they will get to keep the present interest rate on the home. Many couples have had great success with this process, but there are a few drawbacks to keep in mind:
There needs to be enough in marital assets to make sure that the value of the home is being shared evenly between the spouses
It is typically more time-consuming than regular refinancing and could take several months
Some mortgage lenders require an actual divorce decree before they will process the assumption, which means you might need to be divorced faster than you want to be.
Reduce the amount of the “cash out” at the time of refi by having the spouse keeping the house take less of something else. For example, the spouse keeping the house takes less of the other spouse’s retirement account, shortens the duration of alimony payments, or takes less in monthly child support. If you look at the numbers creatively, you can achieve a refinance that takes less equity out of the home, thereby helping you manage the monthly costs post-divorce.
Adopt the motto "adapt and conquer" to bring that same mindset throughout the process! Think through your next steps and decide how much time you want to spend remaining in an unhealthy status quo.
If you would like more support in figuring out a family transition, book a complimentary call with Regina! If you’d like to start figuring out possible mortgage solutions, contact Merritt Mortgages for a free consultation and expert guidance.
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