The Impact of Interest Rates on a Divorce Buyout

In 2018, the market saw interest rates rise by 3/4 to 1% on traditional, conventional, fixed-rate mortgages. This doesn’t seem like much at first glance, but this small difference can critically impact a divorcing client’s debt-to-income ratio and, ultimately, determine whether or not they’ll be able to keep their home.

Let’s look at the numbers:

Amount to refinance:
Loan rate at first meeting with divorce attorney:
4.375% = $1,747.50 monthly (P&I)
Rate at time of actual loan application:
5.375% = $1,959.90 monthly (P&I)
That’s a monthly payment difference of
$212.40 per month.

If your client lives in the Bay Area, these numbers can easily be tripled, quadrupled or more. So the question is: can your client qualify to keep the house after a divorce?

The other metric to keep in mind is the current rate of the existing mortgage vs. the rate to which your client will actually be subject when refinancing. Loans obtained in the recent past enjoyed historic lows, so while your client may be enjoying a very low 3.25% interest rate now, they’ll be refinancing at today’s rates, which may be much higher.

Let’s look at those comparisons:

Amount to refinance:
Existing mortgage interest rate:
3.25% = $1,523.22 monthly (P&I)
Potential interest rate to refinance for buyout:
5.375% = $1,959.90 monthly (P&I)
That’s a difference of
$436.68 per month.
Again, Bay Area figures will almost certainly be higher.

Can your client comfortably make that payment every month?

About debt-to-income ratio

Most loan programs require a 40-50% debt-to-income ratio. That means that if a person makes $10,000 per month, their total revolving debt (house payment, credit cards, car payments, student loans, etc.) cannot exceed $5,000. If a client’s expenses are too high, a difference of just $212.50 per month can disqualify them from borrowing. 

The risk to current and upcoming divorce cases lies in the financial impact on the in-spouse who refinances the loan to buy out the other spouse.

The best advice is to be absolutely sure the in-spouse can continue to qualify during market fluctuations. Rate volatility can throw off equalization payments and affect the court’s disposition orders, so always have best- and worst-case loan scenarios ready, and be sure to discuss these fluctuations with your client early on.

If you have questions or want to discuss case scenarios, reach out anytime.

And, as always, get title documents in 24-hours or less:

Submit a Document Request

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s