Separation in a Time of High Interest Rates

It’s always been difficult to negotiate the finances around a separation. A family has grown accustomed to the expenses of one residence and suddenly the same amount of combined family income must support two residences. But in today’s economic climate, the increased cost associated with a separation has grown to record levels.

The Problem

Typically, when spouses separate, they consider whether one of them will remain in the home that they have shared, or whether they will sell the shared home, divide the equity, and each establish new residences. If the shared home had accommodated the family when it was intact, presumably neither spouse requires a home of the same size, and both could consider downsizing. Additionally, selling the shared home frees up credit for both spouses to secure new mortgage indebtedness and offers each spouse equity to put down on their respective new residences.

Alternatively, if the spouses agree one of them will stay in the home they previously shared, the spouse staying in the marital home could refinance the existing mortgage to buy out the relocating spouse’s interest, and release the moving party from that loan. The relocating spouse could secure a new mortgage and have equity for a down payment on a new home purchase. With interest rates on new mortgages hovering at or around 8%, these conventional paths have become difficult, if not impossible, for many separating couples. The mortgage interest rate on the shared home is likely associated with a loan of several years ago, meaning the existing mortgage rate is likely far below present market rates. Thus, to sell the house means both spouses are losing a favorable interest rate and facing the prospect of new home purchases at the much higher current interest rate.

Even if each spouse downsizes, the current interest rates are so drastically higher than interest rates of as little as 3 years ago, each spouse’s separate monthly mortgage payments on a smaller home might be more than the one combined payment they previously shared for a larger home. Alternatively, if one spouse stays in the home, and refinances the mortgage indebtedness at the market rate to release the relocating spouse, the spouse staying in the home now has not only a higher interest rate, but takes on a higher principal balance in order to cash out equity to buyout the relocating spouse’s interest in the shared home. The cost of staying in the home is now multiplied to such an extent that it is likely unaffordable.  And the relocating spouse is faced with taking on a loan at a very high-interest rate.

The Impact

The practical impact of these higher interest rates is that estranged spouses continue to reside together longer than they would prefer. While spouses may live on separate levels of the home, family meals become opportunities for confrontation. The potential for domestic violence increases.

We are starting to negotiate time-sharing schedules between cohabitating estranged partners such that Parent 1 is responsible for dinner and extracurricular activities on certain nights of the week, and Parent 2 is responsible on others, with parents alternating weekends taking the children out of the house, all in an effort to minimize the opportunities for overlap at the home. Separation comes with the reality that  the relocating spouse may not be able to buy a new home, may need to rent, may need to move in with family or friends, or may need to move further away to find housing that the family can afford.

Couples are less likely to sell the marital home and relinquish their low mortgage interest rates. But keeping the home might not be a wise compromise – this locks up equity – makes it harder for the relocating spouse to finance the purchase of a new home – can’t qualify for a second loan and has no access to the equity from the first home to put money down on a new home.

Possible Solutions

In rare cases, banks are permitting the spouse who stay in the home to assume the mortgage in their own name, individually, on the same loan terms as the parties jointly shared, provided the remaining spouse qualifies for financing. This keeps the monthly mortgage payment reasonable for the spouse who stays in the home. However, it doesn’t solve all the problems.

Unlike a refinance, in which one spouse could borrow more money against the equity in the home to buyout the other’s interest in the home, a loan assumption keeps the loan balance at the same level. The relocating spouse has no access to the equity that remains trapped until the home is sold or until rates drop and the remaining spouse can refinance. If the spouses have other investments, however, there are creative ways to structure a buyout using other assets such as cash or retirement accounts, in lieu of a refinance.

Alternatively, the spouses might agree to keeping both names on the mortgage, thereby avoiding a refinance, and agreeing instead to list the house for sale or refinance on some future date, for example no more than 3 years away, or within 60 days of interest rates dropping below 5%. The spouse remaining in the home agrees to pay all the expenses of the home and indemnify the other spouse from any liability therefore. While this does lock up the equity in the home for both spouses, it keeps monthly expenses under control. And if the party agreeing to relocate is not intent on buying another residence (which would require equity and credit), this may be the most fiscally responsible approach.

How can we help you strategize about a potential separation? Reach out to Meg Rosan, chair of the family law practice group, at (301) 656-1177 x317 or mrosan@bulmandunie.com.