Mortgage Assumption vs. Refinancing After a Divorce

When going through a divorce, an important financial decision that many couples have to face is whether one spouse may have to take over the mortgage of a shared home (referred to as mortgage assumption) or refinancing after a divorce. This decision will depend on the mortgage terms and each spouse’s individual financial situation.

A financial advisor can also help you create a financial plan that addresses your needs during and after a divorce.

What Is a Mortgage Assumption?

A mortgage assumption is when one spouse takes over the existing mortgage in their name, and assumes full responsibility for the loan’s payments and terms. The original loan terms remain intact, including the interest rate, which can be beneficial depending on current mortgage rates. However, not all mortgages are assumable, and the lender must approve it after performing a credit check and income verification.

What Is Refinancing?

Refinancing your mortgage is a common choice when the original loan is not assumable or when new loan terms are more favorable. When you refinance after a divorce, either you or your ex will apply for a new loan with new terms, which can include a different interest rate, loan length and payment structure. Refinancing may also come with closing costs and fees, and the spouse applying for the refinance must qualify for the new loan based on their individual financial profile.

Mortgage Assumption vs. Refinancing Key Differences

Understanding the key differences between mortgage assumption and refinancing is important during a divorce, as it can impact how you manage the property and finances after the separation. Here are five key differences:

Loan terms: A mortgage assumption allows you to keep the existing interest rate and payment schedule. Refinancing replaces the current mortgage with new terms based on market conditions and the applicant’s credit profile.
Qualification process: With mortgage assumption, the lender still needs to verify that the assuming spouse can afford the mortgage but it generally involves fewer steps than refinancing.
Costs: Refinancing comes with closing costs, typically ranging from 2% to 5% of the loan amount, but also a chance to lower the interest rate if market conditions are favorable.
Loan types: Not all loans are assumable. Conventional mortgages are usually excluded, meaning refinancing may be the only option. FHA, VA and USDA loans, on the other hand, often allow assumptions.
Credit impact: Refinancing involves a hard credit inquiry, which can impact your credit score. Mortgage assumption typically doesn’t require a hard pull on your credit, though lenders still check to ensure you can manage the payments.

Alternatives to Mortgage Assumption and Refinancing

Here are three general alternatives to consider when going through a divorce:

Buyout. With this alternative, one spouse buys the other’s share of the home to become the sole owner. This often requires refinancing to remove the other spouse from the mortgage and to access equity if the buying spouse needs cash to complete the buyout. A buyout is ideal if one spouse wants to remain in the home and has the financial means to afford it.
Selling the home. Another alternative is to sell the home and split the proceeds between both spouses. This option eliminates the need for either party to take on the mortgage and can provide both individuals with liquid assets to start fresh after the divorce.
Co-Ownership. Some divorced couples opt to continue co-owning the property, especially if they have children and want to maintain stability. This option requires clear agreements on how expenses and responsibilities will be shared, and it’s important to consider the long-term implications of co-owning property after divorce.

Mortgage Assumption vs. Refinancing: Which Is Best for You?

Consider your financial capability. If you cannot qualify for a refinance on your own, assuming the mortgage may be your only option. Refinancing may be a better choice if you can lock in a lower interest rate.

You should also think about the home’s equity. If there is significant equity in the property, a buyout may be necessary to compensate the spouse relinquishing ownership. Refinancing could also help access some of that equity, which may be useful during divorce negotiations.

Emotional attachment is another factor. If one spouse wants to keep the home for personal reasons, either option can allow the other spouse to be removed from the mortgage without selling the property.

Finally, consider your creditworthiness too, as refinancing requires strong credit. If your credit has been impacted, assuming the mortgage with the original terms may be easier, but make sure you can handle the payments on your own.

Bottom Line

A couple arguing over finances before a divorce.

Choosing between mortgage assumption and refinancing during a divorce requires careful evaluation of your financial situation, mortgage terms and long-term goals. Mortgage assumption lets you keep the existing loan, while refinancing allows you to start fresh. Alternatives like buyouts or selling the home may offer more flexibility if neither option is suitable.

Financial Planning Tips

A financial advisor could help you create or adjust a financial plan after a divorce or another life-changing event happens. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
If your financial goals change after a divorce, and you want to know how much your investment could grow over time, SmartAsset’s investment calculator could help you get an estimate.