Some newly divorced people find themselves handling their finances for the first time in years. They also may be looking at how to stretch paychecks to cover the expense of running a second residence now that the marriage is over. If one spouse chooses to remain in the family home, it could make sound financial sense to refinance the mortgage.
There are several options
Mortgage rates are at a historic low, which likely means that the homeowner has the opportunity to restructure their expenses. Some advantages to doing this include:
- Lower payments: Lowering the monthly mortgage payment can have a significant impact on the budget. Money saved for getting a lower interest rate on the loan can go towards college tuition, paying bills or even going on vacation.
- Cash-out option: The owner pays off the original loan and gets a chunk of cash back. This money can go towards buying a second home or to pay off high-interest debts like credit cards. Even if the amount of the mortgage is higher, the lower interest rate saves money in the long run.
- Pay down the principal: If the settlement involved a lump sum, it might make sense to pay down the principal on the loan, thus reducing the monthly mortgage payment.
- Increase or reduce the loan term: Increasing the length of the loan term spreads the payments over a longer period and lowers the monthly payments. Reducing the term translates to fewer payments at a higher rate but with less interest paid.
There can be little out of pocket expense in refinancing because costs are folded back into the loan. Moreover, the bank pays the mortgage broker’s commission.
It can be part of the divorce agreement
Those who are getting divorced may wish to refinance as part of dividing marital assets or restructure their debt. Clients can discuss the matter with their attorney and the mortgage broker to determine the best course for a more secure financial future.