When Buying Out a Spouse is it Better to Refinance Existing Mortgage or Do New Mortgage?
Buying out your portion of a house from your spouse usually occurs as a result of a divorce. If your divorce decree gives the home to you as a full owner, you will need to make arrangements to take your spouse off of the mortgage and the deed. Doing so will require action on your part and, if not done properly, you can find yourself in financial trouble.
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Purpose
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If you are awarded the house in a divorce, it may be tempting to buy out your ex-spouse's portion of the equity and just continue to make your mortgage payments. However, this arrangement will keep you financially entangled with your ex and will not complete the division of property because your former spouse's name will remain on the mortgage and the deed. If you wish to sell it in the future, you will need to find your ex, ask for all of the signatures required to close a sale and risk a difficult situation if your ex-spouse chooses to be uncooperative.
Refinance
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One way to untangle your finances is to refinance.To do this you will need to qualify to make the mortgage payments alone, and your credit score should be high enough to for loan approval. Also, the house must be worth at least what you currently owe on it, but, ideally, you will refinance at 80 percent of it's value, and not 100 percent, in order to reduce your monthly payments. You can call your current lender or shop around for more favorable terms from another company. More than likely, you will be required to complete the entire refinance process, even if you stay with your old lender. Although the costs and fees may be less than taking out a new loan on the property, you still will be required to pay certain charges at the close in addition to your prepaid items for interest, taxes and insurance.
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New Mortgage
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If you are unable to refinance, you will need to sell your property and obtain a new mortgage for another house. Your ex must be involved in the transaction because you jointly own the house, and the deed has both of your names on it. Therefore, you will need permission to sell the house. This may cause friction if your spouse does not want you to sell in a down market because there will be less equity, if any, to divide between the two of you.
Quitclaim Deed
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If you determine that you are not able to refinance, but you want to keep the property, you can file a quitclaim deed to remove the name of your ex from the title. However, this will not change the loan documents, and both of you still will be responsible for making payments on the mortgage. If one of you does not pay your share, both of your credit scores will be impacted. Therefore, it's in your ex-spouse's and your best interest to formally change the mortgage as well as the deed in a divorce.
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