4 Reasons to Refinance before a Divorce

It may make financial and personal sense for you to refinance your mortgage prior to divorce. This only applies if you have a joint mortgage with your spouse. In this case, you will face several options. One is to sell the home and split assets or debt. Another option is for one individual to keep the home. If this is the case, it is important to remove the other ex-spouse from both the mortgage and the title. Doing so before a divorce is final can be helpful.

#1 Credit Suffers in Divorce

When you refinance your loan, you will have to go through a credit check. This will assess the strength of your current financial situation, including your liquidity and your debts. Immediately after a costly divorce, both could be in poor condition. This means you will likely receive unfavorable financing quotes. On the other hand, before a divorce, your credit has not yet been damaged, and you have no debts from legal bills. As a result, you will be in better shape to get a good offer on your new mortgage. Financially, refinancing when your credit is solid is a great choice.

#2 Refinancing After Divorce can be Complicated

Many couples think they will wait until a divorce is final, then remove one name from the mortgage. The individual keeping the property will be responsible for seeking a new loan. The problem is: the individual may not be able to find a satisfactory loan. In this case, there is no way to take over the mortgage. The current lender will not likely approve a single borrower if that borrower has a significantly lower income or credit score than the previously combined application showed. As a result, refinancing can be held up, and the party no longer in the house will still be on the hook for the debt.

#3 Divorce Proceedings can Challenge Plans

Even the best-laid plans may fall victim to a bad divorce. You and your spouse may plan on handling the division of assets civilly. However, as emotions become more involved and the divorce proceedings move forward, opinions may change. The result can often be a situation where the judge has to make a decision for you. This is not likely to be the best financial decision for either party. It is better to make large financial decisions before emotions get involved.

#4 Asset Protection is Key

Whenever you enter a divorce, you must be thinking about asset protection. This does not just apply to today but also the future. Imagine a scenario where your ex-spouse's name is still on your mortgage and title. If that individual were to be sued in a liability lawsuit or an IRS tax lawsuit, your home could be at risk since it is legally that individual's property. This is the type of risk you cannot afford to carry into the future. Instead, refinance as soon as possible to establish sole ownership. If you are the party surrendering ownership, you will benefit by a release of all responsibility to repay the mortgage debt.