April 26, 2024Author: Grant Moher, Esq.
April 26, 2024Author: Grant Moher, Esq.
For married couples already going through one of life’s most stressful events, an unwelcome new challenge has emerged: escalating interest rates. As the cost of borrowing money rises, it is adding another complicated layer to negotiate during divorce proceedings, especially for those who own a home together. The divorce rate in the United States is 3.2 per 1,000 population according to the U.S. Census Bureau, equating to approximately 827,261 divorces recorded in 2019.
From deciding whether to sell and splitting the equity, to one spouse keeping the house and refinancing, increased mortgage rates are making an already emotionally taxing process even more difficult to navigate financially. Here’s a look at some of the key ways higher interest rates are impacting divorce for couples with a shared property.
For many years, rising home prices provided a valuable asset for divorcing spouses to leverage and divide. The median home equity for homeowners aged 50-64 (those most likely to be going through divorce) is $143,500 as of 2022, making up about 32% of their median household net worth. However, many markets have started cooling off as higher interest rates price some buyers out. Slowing home sales and price appreciation make it harder for divorcing couples to extract as much equity value out of their home sale. This reduces the overall wealth available to split during divorce asset division.
While uncommon, some may even find themselves in a negative equity situation if home values drop enough, where selling the marital home would not fully pay off outstanding mortgage balances. 44% of homeowners aged 50-64 still have an outstanding mortgage balance, with a median balance of $118,000 for this age group. This “short sale” scenario adds further complications to the divorce process.
In many divorces, one spouse wishes to remain in the marital home, especially if there are children involved. Traditionally, that path involved refinancing the mortgage into just one person’s name and using their share of equity from the divorce to pay off the other’s share of the house.
But today’s higher interest rates are making this path much more expensive. Consider someone looking to refinance a $400,000 mortgage balance—at last year’s 3% rate, the monthly payment was around $1,700. With rates now above 6% currently for a 30-year fixed rate mortgage, that same refinanced loan would cost over $2,400 per month. That’s a difference of $8,400 per year in added housing costs!
This “rate mortgage” expense makes it far more difficult for someone to afford staying in the family home post-divorce on a single income, especially after legal fees and paying out the other spouse’s equity share. Some may have no choice but to downsize or rent for affordability reasons. The homeownership rate for divorced individuals is just 49.7% compared to 78.5% for married couples, showcasing the difficulty in retaining homeownership after a divorce, which higher rates exacerbate.
Even for those who can technically qualify to refinance, higher mortgage rates mean having to pay more in accrued interest charges over the full life of the loan. This eats into funds that could otherwise go towards other priorities like saving for retirement or children’s education costs.
In addition to homes, interest rate hikes reduce the overall net worth available to divide between divorcing couples in other areas like:
With both stock and bond values declining due to higher rates, larger shares may need to be liquidated and split between spouses, eroding future growth potential.
For entrepreneurs going through divorce, rising borrowing costs make acquiring loans more expensive, depressing business valuations that need to be split.
Higher interest rates can negatively impact 401k balances and pensions. Dividing assets like these in the divorce due to current rate impacts could jeopardize spouses’ retirement plans down the road.
In the past, it was generally easier for divorcing individuals to sell their home, split the equity, and both relocate to new areas and get mortgages on new properties separately.
However, with today’s much higher interest rates, some spouses may be hesitant or unable to give up their previously locked-in low mortgage rate. Even with equity from the sale, the mortgage payment on a new loan at 6%+ could be hundreds more per month, straining one’s ability to afford adequate alternative housing post-divorce.
Some may choose to rent temporarily and wait for rates to stabilize before buying again to avoid getting stuck with a costlier new mortgage. But rental payments (with median asking rents at a record $1,314 per month nationwide as of April 2023 and rates in the DC Metro area being considerably higher than the national average) can make that a challenge as well.
The benchmark interest rates used to calculate present and future value also determine the lump sum amounts for things like alimony (sometimes called spousal support) buyouts in many divorce agreements. Higher rates make these one-time lump sum figures larger, potentially depleting more assets for the paying spouse.
Some divorce professionals advise structuring periodic payments over a lump sum if rates are expected to decrease in coming years. This avoids over-paying based on today’s higher rate environment.
After a divorce is finalized, spouses becoming newly single have to deal with higher interest rates when purchasing a new home on their own. Some may not qualify for a mortgage they could have afforded just months earlier before rates spiked.
In addition to down payments being a larger percentage of home values, higher mortgage rates mean affording less house for the same monthly budget. As of October 2023, the National Association of Realtors’ Housing Affordability Index was just 99.2, the lowest level since June 1989, meaning the median income family has barely enough to qualify for a median-priced home. This is especially impactful for spouses who sacrificed two-income household cash flow as part of their divorce settlement terms.
On top of interest rates straining housing costs, general inflation is adding stress through rising costs for things like groceries, gas, utilities, and other basic living expenses. In a divorce, these higher daily costs make supporting two households drastically more expensive than one shared home. This adds to the financial burdens divorcing couples face in an escalating interest rate environment.
For context, adjusting for inflation, the median 1981 home price of $68,900 is equivalent to $226,760 today. But at mortgage rates around 18% in 1981, the monthly payment on that price would equate to over $4,500 today. So while current rates aren’t as extreme, home prices make the overall burden nearly as heavy for divorcing homeowners in this cycle.
While rising interest rates create difficult obstacles for divorcing homeowners to overcome, there are still strategies for making the process as affordable as possible:
If a couple is able to cooperate and the situation works for them, so-called “nesting” arrangements can work. These arrangements involve a couple alternating the use of the family home with their kids (the spouses rent a small apartment and alternate between living there and living in the family home with the children). This allows the existing low mortgage rate to be kept until the family home can eventually be sold. It also keeps the children in the home and allows both parents to spend time with them there.
Navigating a divorce is never easy, and rising interest rates have added another layer of complexity for couples going through this difficult transition, especially homeowners. From declining home equity to higher mortgage payments and alimony costs, escalating borrowing rates impact nearly every aspect of divorce asset division and living arrangements.
While challenges exist, there are still strategies to make the process as financially viable as possible with careful planning and the right guidance. The family law experts at Curran Moher Weis have extensive experience helping clients navigate divorce proceedings during times of economic volatility. We understand the nuances of how rising rates influence asset valuations, mortgage refinancing, real estate transactions, support payment calculations, and more.
If you or someone you know is facing divorce in this rising rate environment, contact us today to discuss your specific situation. Our team will work closely with you to craft a comprehensive legal strategy that protects your interests and financial well-being both now and in the future. Don’t go through this alone – let us be your steadfast advocate during this pivotal life transition. Schedule a consultation by calling (571) 328-5020 or contacting us online.
