When the divorce settlement or separation agreement involves refinancing the marital home, understanding that not all refinances are equal and what your options are can help alleviate some of the frustrations involved.
Basically, there are two types of refinancing options available: Cash-Out vs. Rate-and-Term.
Rate-and-Term
The simplest and most straightforward is the rate-and-term refinance (refi). No actual money changes hands in this case, outside of the fees associated with the loan. The size of the mortgage remains the same; you simply trade your current mortgage terms for newer (presumably better) terms. A rate-and-term refinance may allow you to qualify with a higher loan-to-value ratio (the amount of the loan divided by the appraised value of the property.)
Cash-Out
In contrast, in a cash-out refinance, the new mortgage is larger than the one being replaced. Along with new loan terms, you’re also being advanced money—effectively taking equity out of your home in the form of cash.
Cash-out loans come with stricter terms. If you want back some of the equity you’ve built up in your home in the form of cash, it’s probably going to cost you—how much depends on how much equity you have built up in your home and your credit score. Why the tougher terms? Because cash-out loans carry a higher risk to the lender.
When divorce is present; however, you may still be able to obtain a rate-and-term refinance even when you need to take cash out of the home’s equity to buy-out the other spouse’s equity ownership. Unfortunately, not all refinances in divorce are that simple and may still be classified as a cash-out mortgage.
Your best bet when refinancing the marital home is to speak to a Certified Divorce Lending Professional (CDLP). A CDLP can help guide you and your divorce team to put you in the best position for refinancing.
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