If you’re going through a divorce and selling your home isn’t an option, you can tap into your home equity with a loan to pay your spouse their portion of the asset.
Let’s take a look at your home equity options during a divorce, including a cash-out refinance, home equity loan or home equity line of credit (HELOC).
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How do couples split their home equity in a divorce?
The most common ways to split your home equity in a divorce include:
- Selling the home
- Refinancing the mortgage
- Paying off your spouse with a home equity loan or HELOC
If you and your spouse believe that selling the home is the best option, you can split the proceeds and go your separate ways.
However, if one person wants to keep the home—or if only one person qualifies to do so—you’ll need to find another option for paying your spouse their share of the equity.
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How to tap into your home equity during a divorce
Once you and your spouse determine whether one of you is able to keep the home, you must consider how you want to tap into the home equity to provide the other person a pay out.
The most common option is a cash-out refinance, which allows one of you to buy out the other’s share of the equity.
With a cash-out refinance, you’ll take out a new, larger loan that replaces your current mortgage. The difference in the two loan amounts is yours in cash to use however you choose.
A cash-out refinance also allows you to remove the other spouse’s name from the title, unlike a home equity loan or HELOC.
However, there could be many reasons why a refinance loan isn’t the best option. Maybe you currently have a great low mortgage rate, and refinancing would raise your rate.
Or, maybe you don’t have a lot of equity built up into the home yet.
In these instances, a home equity loan or HELOC may be a better option.
Home equity loans and HELOCs are considered second mortgages, meaning they don’t affect the terms of your original loan, yet allow you to access the equity in your home with a new payment.
Take a look at the following steps to help you determine the best way to tap into your home equity during a divorce.
1. Determine the value of your home
The first step in using an equity loan to pay off your spouse is to determine the value of your home.
One or both spouses should hire an appraiser to evaluate the home and determine its value and help alleviate any disagreements in results.
Once you know the value, you can calculate the amount of equity in the home.
2. Evaluate your home equity
The home’s equity can be split between spouses in many ways, but that figure is based on state laws and other factors.
Often, the equity is split in half or near half.
Assuming this is the case, here is an example of how much equity you each may get in the divorce settlement.
Let’s say your home is valued at $400,000, and your remaining loan balance is $250,000.
The equity in the home would be $150,000. If you split it in half, each of you would ]receive $75,000 in the settlement.
If you’re keeping the house, you’ll have to pay your spouse their share. You can pay them out using the loan options we discussed above: a cash-out refinance, a home equity loan or a HELOC.
Let’s take a look at each of these options in detail.
3. Use a cash-out refinance to pay off your spouse
To use a cash-out refinance to tap into your home equity, you’ll have to make sure you qualify.
Apply for pre-approval with an experienced lender to determine whether you’re able to qualify for the cash-out refinance on your own.
The lender will evaluate the following:
- Credit score
- Income
- Debt-to-income ratio (DTI)
- Whether you have enough equity to refinance
If you aren’t able to qualify for a cash-out refinance, you can apply for a home equity loan or HELOC.
4. Use a home equity loan or HELOC to pay off your spouse
Home equity loans and HELOCs don’t require you to touch your first mortgage, so you can keep your current mortgage rate and terms intact.
Instead, you’ll take out a second loan for the loan amount or a line of credit, which you can use to pay off your spouse.
Of course with either of these options, you will need to take additional steps to have your spouse removed from the title.
Let’s take a look at the difference between a home equity loan and a line of credit:
- Home equity loan: Allows you to take out a lump sum, which you’ll repay at a fixed rate
- Home equity line of credit: Functions as if it were a credit card, where you pull out what you need and repay the balance with variable interest rates
Home equity loans and HELOCs may be an easier and quicker process because they don’t require you to replace your first mortgage, but either of these options depends on your unique financial situation and payment goals.
Tap into your home equity with Compass Mortgage
You and your spouse have multiple options for tapping into your home’s equity and settling your payout. It all depends on your situation and goals to determine which option is the best, and you should consult your attorney before making any decisions.
In the meantime, discuss your options with a trusted mortgage lender who cares about your financing needs.
The Compass Mortgage team treats you like family and will serve as your advocate and partner throughout every step of the lending process.
Get started today with pre-approval, or better yet, Get Committed®, a unique program we offer at Compass Mortgage. Get Committed® provides a fully underwritten loan commitment and locks in your interest rate. This means faster closing times so you can move ahead with your goals.
We look forward to helping you find the best loan option for your unique situation.
Photo by Andrea Piacquadio