In a Nutshell In a divorce, the home is one asset that’s not easily divided. Your options might include selling, refinancing or other tactics, all of which could impact your credit or taxes. Editorial Note: Intuit Credit Karma receives compensation from third-party advertisers, but that doesn’t affect
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Making big financial decisions during a divorce can be incredibly stressful. One of the biggest decisions to make is what to do with the marital home – specifically, whether to assume the existing mortgage or refinance into a new loan under one spouse’s name. This choice will impact your finances for years to come, so it’s crucial to understand the pros and cons of each option.
First let’s review the key differences between assuming a loan and refinancing
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Loan assumption involves transferring the existing mortgage into one spouse’s name. The loan amount interest rate and repayment terms stay the same.
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Refinancing means taking out an entirely new mortgage loan to pay off the existing one. This allows customizing the loan amount, rate, and terms but occurs at current market rates.
Refinancing is a more familiar process for most people. Loan assumption is less common but can provide unique benefits in certain situations, like during a divorce.
Critical Factors To Consider
When deciding between assumption and refinance, here are some of the most important considerations:
Interest Rates
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Assuming an existing loan means locking in the original interest rate, which may be much lower than current rates if it’s an older mortgage. This results in lower monthly payments.
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Refinancing requires taking the market rate at the time, which today is likely higher than rates in recent years. The new mortgage will have higher interest costs.
Closing Costs
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Assuming a loan has lower closing costs, with caps on certain fees imposed by the FHA, VA, and USDA. No appraisal is typically needed.
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Refinancing has closing costs of 2-5% of the loan amount. It requires appraisals and has less regulation on allowable fees.
Loan Qualification
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Assumption involves undergoing full loan qualification based on credit, income, assets, and down payment. Standards can be high.
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Refinancing also requires complete loan approval. But it allows customizing the loan details to match your financial profile.
Ownership and Liability
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Assumption definitively removes the other spouse from the loan and home title with proper documentation.
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Refinancing likewise establishes sole ownership and liability for the mortgage.
Scenarios Where Loan Assumption Shines
Assuming an existing mortgage tends to make the most sense when:
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The current interest rate is significantly below today’s rates. This provides long-term savings.
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The remaining spouse can qualify for the loan independently. Their finances must be strong.
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There is limited available equity to cash-out via refinancing.
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The home has strong sentimental value and selling isn’t desirable.
Specific situations where assumption may be preferable include:
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A recent death of a spouse, to retain a low mortgage rate for the survivor
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Divorce settlements aiming to let one spouse keep the marital home
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Inheriting a home from a parent or relative
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Using a home as an income property investment
When Is Refinancing The Smarter Move?
Refinancing tends to be the better option when:
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Interest rates are near historic lows. It allows locking in a very low rate with a new mortgage.
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The borrower has excellent credit and finances. They can qualify for the best current rates.
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There is significant equity available to cash out and use for other goals.
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The existing mortgage is very old and doesn’t have much principal left.
Particular cases favoring refinance include:
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Needing cash from equity for the property division or other divorce costs
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Wanting to shorten or lengthen the loan term to fit the budget
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Removing a former spouse who won’t cooperate with signing assumption papers
Key Factors To Compare The Options
Here is a summary of how loan assumption and refinancing stack up across several key factors:
| Factor | Loan Assumption | Refinancing |
|---|---|---|
| Interest Rate | Keeps existing lower rate | Gets current market rate |
| Closing Costs | Lower, with some fee caps | Higher, full costs paid |
| Down Payment | Usually larger; covers seller’s equity | Based on new loan terms |
| Ownership Change | Removes other spouse from title | Removes other spouse from title |
| Qualification | Full approval needed to assume mortgage | Full approval needed for new loan |
| Flexibility | Less ability to alter loan details | Fully customize new mortgage |
Finding The Right Solution For Your Situation
As the above illustrates, there is no universal right choice between assuming an existing mortgage and refinancing. The option that best balances cost, convenience, and long-term outcomes depends entirely on your specific circumstances.
The key is carefully analyzing both paths given your financial profile, priorities, and the details of the current mortgage. Doing so can lead you to the optimal decision regarding your marital home during this difficult transition.
With research, prudent planning, and expert guidance, you can make the best choice on managing the mortgage. This provides stability and financial health as you move forward into your new life after divorce.
The law: Community property states vs. common law states
The first thing to understand about dividing up property in a divorce is that your options may vary depending on whether you live in a “community property” state or a “common law” state.
In a community property state, assets acquired during a marriage are typically considered community (or shared) property — and therefore during a divorce are divided 50-50. Community property states include Arizona, California, Idaho, Louisiana, New Mexico, Nevada, Texas, Washington and Wisconsin — along with U.S. territories Guam and Puerto Rico.
All other U.S. states are common law states, where each spouse is considered generally responsible for any individual debt and property acquired during the marriage. This means that if one spouse bought a home on their own, for example, the home generally will belong to that spouse in the event of a divorce (unless both names are on the deed/title or other agreements have been made).
This is just a basic look at the scenarios for community property states and common law states. The details can get complicated, so it’s a good idea to have a divorce lawyer help sort through it all and advocate for your best interests.
Removing one party from the mortgage
Another way to deal with a mortgage during divorce is to remove one spouse’s name from the loan. A couple of ways to do this might be through refinancing or a loan assumption.
Refinancing a mortgage involves taking out a new loan to pay off the original mortgage loan. If two borrowers are on the original loan, you can try to refinance in the name of just one of the borrowers — effectively releasing the other from responsibility and claim.
A cash-out refinance might be a good way for one spouse to refinance a mortgage solely in their name and access the cash they need to buy out the other party.
Keep in mind that if you want to take sole responsibility for a loan through a refi, you’ll need to have the income and credit to qualify. The amount of equity you have in the home will also be a factor in the refinancing lender’s decision and terms offered. And remember, refinancing is essentially applying for a new mortgage loan, with the associated costs, like origination fees.
You can shop around to check current mortgage rates and compare refinance rates on Credit Karma against the terms of your existing loan. Knowing the current rates, what you can afford, and different types of loans and terms can help you find the best mortgage refinancing options. A mortgage refinance calculator can also help you figure out what type of refinancing and terms you may qualify for.
If your lender allows it, you may be able to seek a loan assumption. Unlike refinancing, a loan assumption does not involve taking out a new loan. Instead, it allows one borrower on a mortgage to assume full responsibility for the loan — with no change in terms — releasing the other borrower from their obligation.
Again, the borrower assuming full responsibility for the loan will have to meet the lender’s qualifying requirements.
Keep in mind that a loan assumption isn’t usually an option for conventional mortgages — but certain government-backed mortgages, under certain conditions and with lender approval, may be eligible.
Loan Assumption – What You Need To Know Before Assuming a Loan
FAQ
Can you assume a loan without refinancing?
Is loan assumption a good idea?
Does loan assumption hurt your credit?
How does an assumption loan work?
How much does an assumption cost for a refinance?
In most cases, assumption fees are less than the overall cost of a refinance. Oftentimes, an assumption can be completed by paying less than $1,000 in fees, if it can be completed at all. An assumption, if done correctly, accomplishes the goal of separating yourself completely from your existing joint mortgage.
What is a mortgage assumption?
A mortgage assumption occurs when a new borrower takes over an existing borrower’s mortgage. This means that the new borrower becomes responsible for paying off the remaining loan balance over the remaining term. Depending on the loan type and transfer circumstances, the new borrower could take on the existing mortgage rate.
What is a loan assumption?
Loan assumption, however, allows a buyer to take over the current owner’s mortgage while the loan’s terms — including the repayment period and interest rate — remain the same. Ultimately, it can help people get into a home at a lower interest rate even as the housing market around them becomes more expensive.
Is assuming a loan better than a refinance?
In this regard, an assumption is no different than a refinance, but you are assuming the loan because you expect to benefit from better terms. The burden remains on you to demonstrate that you can take on the full debt load by yourself. A third misconception is that many people think assuming a loan is always a better way to go.
Should I ‘assume’ my mortgage?
• ‘Assume’ the original mortgage. This can be a great option if your existing mortgage allows for a loan assumption. This makes sense when you have good rate and payment terms on your existing mortgage. Of the options, an assumable mortgage is the one that people have the most questions on in my experience.
What is a mortgage assumption in a divorce?
This is not technically an assumption under federal law, but it is very similar to an assumption since the successor inherits the loan’s existing rate and terms. A mortgage assumption can allow one spouse to take over full responsibility for the loan and release the other spouse from liability in the event of a divorce.