A divorce mortgage is a refinance transaction that removes the departing spouse from the current debt secured by the home or other real estate. The spouse retaining the property refinances the loan that is currently in both parties name with a loan in their name alone. A common misconception is that the departing spouse is no longer liable for the mortgage if they sign a Quit (not quick) Claim Deed to surrender their interest in the property. Even if the departing spouse no longer has an ownership interest in the property they are still liable for the mortgage unless the mortgage holder agrees to release them from liability, or the loan is paid off.
In a divorce mortgage the departing spouse may receive cash for their portion of any equity in the home, or simply benefit by being relieved of future financial obligations on the property. Future financial obligations include: potential damage to their credit scores if the remaining spouse does not pay on time, difficulty qualifying for new debt because they are still liable for the old mortgage, etc. The remaining spouse benefits because they now control the property and do not have to rely on the departing spouse if they want to sell or refinance. Yes, I know this is often addressed in the divorce papers compelling one of the parties to perform. In the real world, I see departing spouses who ignore what they are supposed to do, or even worse die, thereby complicating things even further.
Experience has taught me that this should be accomplished as soon as possible. While both parties benefit from a divorce mortgage, we should not assume a departing spouse will be reasonable or follow the conditions in a divorce decree. A sad example of this is the couple who divorced and the departing spouse was supposed to quit claim her interest in the property to her husband. The balance on the mortgage was over $30,000 higher than the value of the property. Despite the orders of the court, the ex-wife refused to sign the quit claim unless she received an additional $5,000! In this case, the remaining spouse, the husband, is stuck with a high interest rate loan that cannot be refinanced.
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