Mortgage Rates, Refinancing, and Divorce: What You Need to Know

Divorce isn’t just about dividing assets - it’s also about making smart financial choices for the future. One of the biggest decisions many couples face is what to do with the marital home. Should you refinance, assume the loan, or sell and split the equity?

With today’s interest rate environment, those decisions can look very different than they did just a few years ago. Here’s what you need to know.

Refinancing to Remove a Spouse

If both spouses are on the mortgage, but only one plans to stay in the home, refinancing is often necessary. Refinancing can:

• Remove the other spouse’s name from the mortgage.

• Provide access to cash for a buyout.
  

But here’s the catch: if rates are higher now than when you first bought, refinancing could lead to significantly larger monthly payments - even if you don’t borrow more.

This trend is reshaping the broader housing market. Many “starter homes” purchased during the historically low interest rates of the early 2020s have effectively turned into “forever homes,” simply because refinancing or upgrading has become unaffordable.

Is My Loan Assumable?

Another option, instead of refinancing, may be to assume the loan.

In this scenario, when a home is transferred, the buyer (or in divorce, the spouse keeping the home) takes over the existing mortgage. The interest rate, repayment terms, and balance remain unchanged, and the new owner simply continues making payments.

• ✅ Good to know: FHA, VA, and USDA loans are generally assumable.

• ❌ Most conventional loans are not assumable because of a “due-on-sale” clause requiring the loan to be paid off when the property changes hands.

If your loan isn’t assumable, the spouse keeping the home must qualify for a new mortgage on their own.

Risks of Tying Yourself to Old Debt

Sometimes divorcing couples try to avoid refinancing by leaving both names on the loan. This may seem simpler in the moment, but it can create long-term problems:

• The spouse who moved out is still legally liable to the lender.

• Late or missed payments can damage both credit scores.

• The non-resident spouse may struggle to qualify for a new mortgage.

Should You Sell Instead?

When rates are high, buying out your spouse’s share of the home may become prohibitively expensive. In many cases, selling the home, splitting the equity, and starting fresh offers the cleanest financial break.

Selling allows both spouses to move forward without being tied to an old loan and gives each a chance to shop for housing that fits their post-divorce budget.

Tax Implications of Selling or Refinancing

Before you make a final decision, don’t overlook the tax impact:

• Capital Gains Exclusion: You may be able to exclude up to $250,000 ($500,000 if married filing jointly) of gain on the sale of your primary residence if ownership and use tests are met.

• Basis Adjustments: Renovations, selling costs, and certain property transfers during divorce can adjust your cost basis, changing your taxable gain.

• Retirement Accounts: In some cases, qualified retirement funds can be used to pay off mortgage deficiencies without penalty if handled correctly.

Final Thoughts

Mortgage rates, and whether your loan is assumable, can make or break the decision to keep a home after divorce. Before you commit to refinancing, assumption, or sale, weigh today’s interest rate environment against your long-term financial health.

What feels like stability now could easily become a financial burden later. Take the time to explore your options, run the numbers, and get professional advice before making one of the most important financial decisions of your divorce.

Disclaimer: This blog is for informational purposes only and does not constitute legal, tax, or financial advice. Divorce and housing decisions are complex, and every situation is unique. Before making any decisions regarding refinancing, assuming a loan, selling a home, or handling tax matters in divorce, please consult with a qualified attorney, CPA, or financial professional who can advise you based on your specific circumstances.