When Ann Shea, 44, was finalizing a divorce last year, she knew she wanted to keep the suburban Chicago home where she was raising her school-age kids. But it was equally important for her to hold onto her relatively low mortgage rate.
She had purchased the home in the summer of 2012, and had refinanced to a rate of 2.8% during the pandemic. She wanted to keep the house to provide stability for her kids, who were still young and attending school nearby.
But to get the mortgage and the title of the home in her name only would have required refinancing, which would have bumped up her mortgage rate to the 6% range, where rates were averaging in mid-April when her divorce was finalized. A back-of-the-envelope math estimate would suggest that her monthly mortgage payment could have ballooned by 33%.
“The divorce was so expensive, and to think about adding on that cost would have been terrible,” Shea, a compliance attorney, told MarketWatch.
Moving to such a comparatively high mortgage rate after 11 years of paying off the 2.8% loan would have felt to Shea like she had “lost all that ground,” she added.
Shea’s plight is becoming more common. As mortgage rates soared from historic lows during the pandemic to two-decade highs at the end of 2023, homeowners with rates under 3% became the envy of their friends and family. But when a marriage splits up, the question of who walks away with the lower mortgage rate sparks far more than casual jealousy.
It’s increasingly a source of tension at the divorce negotiating table, Alla Roytberg, a New York City-based family and matrimonial law attorney and a mediator, told MarketWatch.
“In the past, when rates were low, it was an easy answer, because somebody could refinance and get a 3.5% rate,” Royberg, who has been in matrimonial law for the last three decades, said. “And now, they have this 3% rate, and if they refinance, they’re going to get 7% or 6% — and that makes it unaffordable.”
Unconventional solutions to who keeps the low mortgage rate
Historically, a couple who is going through a divorce will either work out an arrangement to refinance the home and put it in one spouse’s name, or if the divorce is acrimonious, they can be forced by a court to sell the home and divide the proceeds, Erin Levine, co-founder of Hello Divorce, a company based in Alameda, Calif., that sells online divorce services, told MarketWatch.
Levine is a family law attorney licensed in California, and has helped more than 5,000 individuals through the legal process of divorce. Hello Divorce recently beefed up its real-estate arm, because it’s seen a surge in interest in home-owning couples interested in divorce.
Those traditional methods are still an option separating partners pursue today. But the large gap between prevailing mortgage rates and the rates on divorcing couples’ homes, coupled with a more expensive housing market, has prompted some to turn to unconventional strategies to divide real-estate assets. They can include deciding to co-own a property together or agreeing to stay in the same house for a certain number of years.
“People are trying to figure out ways to work things out of court,” Levine said.
The financial motivation is strong, too. “We have to come up with creative options over how to handle those kinds of cases,” added Roytberg. “Some of them are barely able to find the budget that they were living with. How do you add another three, four thousand dollars in rent, when the money isn’t there?”
Some couples are finding innovative solutions — from sale leasebacks to mortgage assumptions — to hang on to their prized ultra-low rate. Others are resorting to less sustainable stopgap measures.
Here are some of the scenarios couples are turning to:
Stalling until the market improves
One strategy is to “buy time,” Levine said.
In this scenario, the couple finalizes their divorce, but continues to co-own the home while waiting for rates to fall. Either they stay together in the house, or one spouse moves out, but they both continue to own the home together to avoid refinancing.
About a tenth of the divorcees on Levine’s platform are saying, “‘I really want to stay in the house, I can’t afford these mortgage rates, and I don’t know what the market’s gonna look like, so give me two years,’” Levine said. “And with you staying on the mortgage, in exchange, I’ll pay you some money.”
Some arrangements include a higher-earning spouse paying the mortgage in place of spousal support, and then deducting it from their taxes, Roytberg explained. “It helps both sides,” she said, “because they don’t need to refinance at a higher rate for the other, and [the higher-income spouse] could directly pay the mortgage instead of spousal support.”
Continue living together while you ‘wait and see’
The so-called lock-in effect — which refers to high mortgage rates forcing homeowners to stay put in homes with lower rates — has most homeowners frozen in place for the time being. Few are willing to give up their home and their low mortgage rate and move to a house that costs more, and requires a mortgage with significantly higher borrowing costs. That’s also led to a squeeze on resale inventory, which is hurting aspiring homeowners.
But with rates staying below 7% since mid-December, there are some early signs that the housing market is coming back to life.
“Buyers and sellers are learning to live with uncertainty,” Shay Stein, a Las Vegas-based real-estate agent with Redfin
RDFN,
said in a recent report. “They’ve realized no one has a crystal ball that can predict exactly when mortgage rates will fall back to 5%, so they’re making moves now,” she added, “because they can only wait so long to be near their grandkids, live in an RV like they’ve always dreamt of, or finalize their divorce.”
But some divorcees are not as keen, opting to wait and see.
“I had one [divorcee] that had decided that he was just gonna live in the basement, so good luck with that,” Jae Tolliver, an Ohio-based mortgage broker with Union Home Mortgage, told MarketWatch, referring to someone who wanted to continue to live in their existing house, even though they had split from their spouse. “People are definitely trying to get more creative.”
Tolliver recently quipped on social media that couples are staying together not for the kids’ sake these days, but rather for their low mortgage rate.
He also described another client who decided to stay in the house with their ex-spouse after the divorce, and continue to pay the mortgage payments like before just to keep the low rate.
But “it wasn’t working out so great,” Tolliver said. “Because at the end of the day, you have a divorced couple that’s living under the same roof, and that just isn’t going to work.”
Co-owning the home until a milestone is reached
Some splitting couples decide to continue to own their home together until a certain milestone, such as their youngest child graduating from high school.
“It’s almost always tied to kids,” Levine said, because couples often want to provide stability. For example, a child who is involved in a very competitive sport may require more consistency in their schedule, so the parents may opt to stay put until the child gets to college.
Sale leasebacks
Some couples are turning to sale lease-backs, a strategy which Levine says is something she hadn’t encountered recently.
Similar to the concept of buying time, a sale leaseback between a splitting couple can mean an arrangement where one individual sells the home to the other, and then rents it back from them with the option to repurchase their share later.
“Some of our customers like it, because in divorce, a lot of people’s credit is screwed, as they’ve been separated for a while and in different households, so they haven’t been paying bills,” Levine said. Those financial setbacks could make it difficult to rent or buy a place on their own.
By selling their share to their ex and leasing it back, they can secure a place to live without having to worry about the debt-to-income requirements, or their low credit score, which can be obstacles to finding housing, she added.
Biting the bullet
Other divorcing couples, anticipating the struggles ahead should they fight to keep their low rate, have decided to bite the bullet and refinance.
Take one recent divorcee’s case in San Mateo, Calif.
After a mother of two split with her husband in December 2021, they had gone through the process of formalizing their divorce. That meant that she would have to give up the 3.25% mortgage rate that she got in 2020.
She spoke on the condition of anonymity because she did not want her story to affect her child support payments.
“I had to refinance while rates were insanely high,” the homeowner told MarketWatch.
She refinanced in October 2023 to get her ex-husband off the mortgage and the title of the home, as well as to buy him out of his equity in the home. She ended up with a 30-year mortgage rate of 8.25%.
“I have an awful rate right now, I mean, it’s ridiculous. My mortgage has more than doubled,” she added. Her monthly payment went from $1,450 to $2,975.
She considered the possibility of selling the home and using her share of the proceeds to buy another one, or even renting a cheaper home.
But both options were unappealing because she would still be stuck with a higher rate, and would lose her home, which she has lived in since December 2013. She hopes to refinance in the future when rates fall.
“I’m just looking at it as if it’s temporary,” she added. She also got a raise recently which could help offset some of those expenses.
Shea’s solution: Assuming the mortgage
Shea, the suburban Chicago divorcee who didn’t want to give up her 2.8% rate, managed to land a mortgage assumption, meaning that she essentially took over the existing mortgage that had been in both her and her husband’s name, at the same rate.
Assumable mortgages have become an incentive offered by some sellers, but they are rare and only available in certain circumstances.
Shea worked with Tami Wollensak, a mortgage broker who is also a Certified Divorce Lending Professional with specialized training on divorce-related real-estate transactions.
It was Wollensak who recommended that Shea ask her lender if she could assume the loan in her own name. She guided Shea on how to ask for the right department and how to request an assumption, rather than a regular refinance.
“It’s very unusual,” Wollensak, who is also based in Chicago, told MarketWatch. “Every lender looks at it differently.”
Fannie Mae
FNMA,
guidelines give lenders some discretion to grant assumptions to people who are going through life transitions. But borrowers have to qualify for the mortgage and must be able to afford it on their own. The timing of the divorce must also allow for the assumption process to complete.
When Shea first asked her lender, Iowa-based Green State Credit Union, about an assumption, she was turned away. But the duo kept digging and asking for different people to talk to.
The lender eventually allowed Shea to assume the mortgage at 2.8%, and have only her name appear on it. Wollensak says the lender may have allowed Shea to take over the payment alone without her spouse based on her strong credit profile. Green State Credit Union did not respond to a request for comment.
“It depends from servicer to servicer. It’s very much like the Wild, Wild West,” Wollensak said. Shea did not pay any expenses associated with the assumption of the loan, such as closing costs or other fees.
“It was a lot of back and forth trying to find the right person,” Shea said. “I’m so grateful.”
