How Can We Divorce in a Challenging Housing Market?

Divorcing couples across New Jersey and Pennsylvania face immense housing complications in the current real estate climate. Higher interest rates make refinancing formerly low-rate mortgages an unattractive option that could significantly increase monthly payments. For example, a couple that currently holds a $300,000 mortgage at 2.5% would see their monthly payment jump from $1,265 to $1,951 if they refinanced at 7%. This is a 54% increase.

The current interest rate disparity between the record low rates of under 3% just a couple of years ago and the current interest rates that are over 7% as of the end of November 2023 pose a major challenge when attempting to buy out a spouse's share of home equity during divorce proceedings. Additionally, the ongoing shortage of affordable starter homes on the market makes finding suitable alternative housing difficult, especially for spouses of more modest means.

?With so many couples holding mortgages with favorable interest rates of around 2.5%, the thought of giving up these rates and taking on higher housing costs often deters couples from finalizing divorce agreements. This is one of the reasons that many divorcing couples are opting for mediation. Divorce mediation makes sense, especially in instances where creativity and out-of-the-box ideas (that mediators help couples develop) are critical in order to come to an agreement.

Benefits of Divorce Mediation

Divorce mediation provides several clear advantages over pursuing a traditional litigated divorce:

• Cooperative Process: Mediation encourages open communication and collaboration between couples to reach equitable solutions. Rather than battling as legal adversaries, which often destroys goodwill, mediation promotes compromise through a cooperative process focused on win-win outcomes. This lays the foundation for a healthier relationship and more effective co-parenting post-divorce.
• Cost Effective: Mediation avoids high attorney fees and other legal expenses incurred through lengthy court proceedings. This helps to ease the financial strain for divorcing couples.
• Faster Resolution: By bypassing backlogged court calendars, mediation allows couples to resolve divorce issues in a matter of weeks rather than the months or years it can take for litigation. This brings quicker closure for couples to move forward.
• Creative Solutions: Courts typically follow state formulas and guidelines for dividing assets. Mediators help couples explore their specific situation in-depth to identify customized options tailored to their needs and priorities. This creativity is particularly helpful for complex issues like housing.

With housing affordability issues and higher mortgage rates, many couples find themselves stuck in an unworkable living situation during their separation. Divorce mediation opens the door to exploring innovative housing solutions, so they can finalize their divorce and move forward with their lives.

Divorce Mediation for Housing Issues

As we have talked about, divorce mediation offers much-needed flexibility to explore customized solutions tailored specifically to a couple’s housing situation and priorities. Rather than strictly following state asset division guidelines, mediators help couples think outside the box to identify optimal solutions for their unique situation that courts simply do not have the time to delve into.

?Possible solutions for divorcing couples with a low-interest home mortgage include:

• Remain Joint Homeowners: While challenging, one separation option is for ex-spouses to initially remain as joint owners of the marital home after a divorce. Detailed plans would need to address scheduling, access, expenses, future sales, etc. This maintains stability if buying/selling now is unworkable. Some couples opt to go a step further and remain living together in the home. This is not an easy situation but when couples are willing, I make sure to support them with house rules and detailed plans about living and having custodial and parenting time.
• One Spouse Keeps the Home: If one spouse wishes to remain in the marital home with children, for example, mediation can facilitate this spouse buying out the other’s share of equity and assuming full ownership rights and mortgage obligations. One way this could be done is for the purchasing spouse to take out a home equity line of credit (HELOC) so they would not have to refinance the first mortgage until later when (hopefully) the rates come down. This option would require there to be enough equity in the home to take out a second mortgage, however.
• Delay Refinancing Using Other Assets: If sufficient other non-housing assets exist (retirement accounts, investment funds, etc.), these could potentially finance a buyout to avoid an untenable refinance of the couple’s current low mortgage rate. This solution involves assigning the home/mortgage to one spouse while the other spouse receives an equitable share of the remaining assets.
• Ensure Buying-Out Spouse Can Still Qualify for Future Purchase: Language can be built into the mediated divorce agreement confirming the transfer of mortgage liability. This helps ensure a spouse who relinquishes rights to the home can still qualify for future mortgage loans once their financial situation stabilizes post-divorce.
• Sell the Home and Split the Proceeds: Perhaps the simplest solution is to sell the home and divide the money after paying off the mortgage and any other debts. This option allows both spouses to start fresh and buy or rent a new home. However, this option may not be feasible if the home has negative equity, or the market is slow.
• Rent Out the Home: If neither spouse wants to keep the home or sell it, they can rent it out to a third party and use the rental income to cover the mortgage and other expenses. This option can generate some cash flow and preserve the home’s value until the market improves. However, this also involves some risks and responsibilities, such as finding and managing tenants, maintaining the property, and paying taxes and insurance.
• ?Rent Out a Room: Where permitted, converting common spaces into rental units could generate supplemental income making homeownership more affordable for the spouse retaining possession of the home.

These types of situations require clear and thorough planning. We don’t know how long the current housing market is going to last or even get worse. But whatever the future holds, there is no need to put your lives on hold. You just need to work with someone who is going to help you find the right solutions.

Need a Creative Solution for Your Upcoming Divorce? Advanced Mediation Solutions is Here to Help

The uncertainty of today’s housing market can pose substantial difficulties for divorcing homeowners. Whether choosing to stay in the marital home temporarily or permanently, buy out equity, postpone refinancing, or pursue other avenues, couples need not delay finalizing their divorce due to housing.

To find out how mediation can help overcome complications such as the current interest rate disparities within the marketplace, contact Advanced Mediation Solutions. Call us today at (856) 669-7172 or message us online to set up a free, no-obligation consultation.