Keeping the Marital Home in a Divorce: Navigating Rising Rates and Equity Buyouts

In any divorce, decisions about the marital home can be some of the toughest to make. As interest rates climb, refinancing to retain the home becomes more challenging, especially when one spouse must take on a new mortgage to buy out the other’s equity. Here’s a look at the challenges involved, along with some strategic solutions to help you keep the home, if that’s the best option for your future.

Issues in Retaining Marital Home

When deciding to keep the marital home, two key financial hurdles come up:

• Rising Interest Rates: With the current economic climate, interest rates are significantly higher than in recent years. This means that refinancing may come at a higher cost, adding strain to an already difficult financial transition.
• Equity Buyouts: To keep the home, you often need to “buy out” your soon-to-be-ex by paying them their share of the home’s equity. This requirement can lead to a much higher mortgage, depending on how much equity is tied up in the property.

Solutions to Consider

Keeping the marital home may still be feasible with some strategic planning. Here are some potential ways to manage the refinancing and equity buyout hurdles:

Give Yourself Time to Refinance

• If you want to keep the house, time can be your ally. During divorce settlement negotiations, it’s possible to structure an agreement that provides additional time for refinancing.
• In some cases, the settlement can be crafted to include protections for the spouse leaving the home, ensuring that they still have a claim to their share of the equity even if the refinancing process takes longer than expected.
• This extra time can allow you to explore more refinancing options, find a rate that’s more manageable, or simply allow for some breathing room during this transitional period.

Get Creative with Financial Resources

• For divorcing couples, certain retirement accounts—like a 401(k)—can offer unique opportunities for funding without the typical penalties.
• The IRS allows for a one-time penalty-free distribution from a 401(k) for divorcing individuals, which may provide a source of cash for a buyout. Be sure to discuss this option with a financial planner, as while penalty-free, it’s still a taxable event.
• Alternatively, some people may choose to take a loan from their 401(k). While this approach also has implications for retirement planning, it can be a more favorable option than taking on a higher-interest mortgage.

Divorce brings challenging decisions, and deciding what to do with the marital home is often one of the most emotional. As rates rise, consider working closely with your Certified Divorce Financial Analyst (CDFA) to evaluate your options. In many cases, with a bit of creativity and careful planning, you can find a solution that works for you—allowing you to keep the marital home and stay on track with your financial goals.

To discuss options that might be available to you, reach out for a complimentary meeting.