Under Pennsylvania law, almost all forms of property acquired by either spouse during a marriage are considered part of the marital property, and therefore subject to division in divorce. Property includes both assets and debts, so many couples must figure out what to do with their homes and home mortgages in divorce.
This can be a tricky process at any time, but events over the past few years have made things more complicated for a lot of divorces. After years of historically low rates, the Federal Reserve began raising interest rates a few years ago as part of its efforts to combat inflation.
If a couple bought a home or refinanced their mortgage when interest rates were low, they may be surprised to find how much interest rates have risen. This drives up the cost for one spouse to remortgage the home in their name.
The options
When dividing a home in divorce, there are three main options, all with their own advantages and disadvantages, and all three have been affected by the rise in interest rates. They are:
- The parties can sell the home. In some ways this is the simplest option because it allows the spouses to divide the profits between them according to their divorce settlement. However, rising interest rates have cooled the market somewhat, so selling the home may be more difficult than some people expect.
- The parties can keep the home. In this scenario, the divorced spouses continue as co-owners of the home. They might rent it out and divide the income. The obvious downside to this option is it means the ex-spouses must become business partners, Many people do not want to do that after a divorce.
- One party keeps the home and buys out the other’s share. This option has the advantage of letting one spouse stay in the home and providing the other with cash, but rising interest rates have made it somewhat less appealing and potentially not possible, depending on the spouse’s credit, income and general financial situation.
The buy-out
Choosing the third option requires the parties to retitle the property, and for one spouse to take over the mortgage. Rising interest rates mean that this may be more expensive than they expected and their mortgage payment may increase significantly.
In some cases, one spouse may be able to simple assume the old mortgage solely under their own name. However, changes in the law and the mortgage industry have made it more difficult to assume a mortgage from a co-borrower and typically each lender has its own rules about this.
This means that one spouse will likely have to re-finance the mortgage in their own name. Higher interest rates can put this beyond reach for many people. It’s also important to note that the person who wishes to keep the home must qualify for the mortgage as a single person.
The bottom line is that those who wish to keep their family home after divorce must do some careful calculating and budgeting to determine whether they can afford this option.