Mortgage Assumption vs. Buyout: What’s the Best Course for Your Divorce?
While purchasing a home is likely an exciting chapter for married couples, in divorce proceedings, owning a home can bring a wave of questions and concerns.
In a divorce, a very important shared asset to divide is the marital home. One of the simplest and most cost-effective methods to avoid a contentious battle is to assume the mortgage on the marital home rather than buying out the home from a former spouse.
What is a Buyout?
A “Buyout” is when the buying spouse pays the other for their share in the value of the home or mortgage. It is important to understand that a buyout must be agreed upon and cannot be forced. Calculating a house buyout requires the buying spouse to:
- Evaluate the current market value
- Assess the outstanding mortgage balance
- Determine the other spouse’s equity interest in the home
Once the spouse’s share in the marital home has been calculated, the buying spouse must then determine how they will fund the buyout.
Funding a buyout is typically done by either refinancing the mortgage, taking out a home equity loan or using cash if available. While refinancing allows for the other spouse to be taken off the loan and equity to be removed, doing so or taking out an additional loan comes with potential costs and risks, including not qualifying for a new loan or refinance and potentially getting a higher interest rate than the original mortgage.
What is a Mortgage Assumption?
A mortgage assumption, however, is when one spouse agrees to take sole responsibility for the mortgage payments. This method comes with less risk as a mortgage assumption effectively takes the other spouse off the loan and ensures the interest rate, terms and balance remain the same.
The benefit to the other spouse is a release from liability on the mortgage payments. As not all banks allow for assumptions, parties must contact their bank to determine if the assumption can occur.
If neither party wants the home nor can afford to remain in the home, often it will be sold and proceeds from the sale will be divided by the parties.