mortgage rates trend up

Mortgage Interest Rates Trend Up and Splitting Couples Better Take Note

Mortgage interest rates are trending up. This is an impactful end of an unprecedented mortgage rate cycle with historically low rates. The length of this rate trough created an expectation of continued low rates with accompanying assumptions for financial and life decisions. This, of course, works until it doesn’t and many people are seeing future plans unravel with higher payments.

A Major Mistake When Mortgage Interest Rates Trend Upwards

When a divorce involves a home, many couples wisely check their credit and run the numbers for refinancing or qualifying for a new payment prior to the divorce. The problem is that many of these analyses are done with an uninformed or flawed rate assumption, which is usually lower than the true market rate. It is natural to lag behind the changes in a rate rising environment as the mortgage-interest-rates-will-trend-back-down mentality guides their thinking as opposed to a more rational evaluation of the rate environment. They simply do not accept that low rates may likely be gone. This is a major mistake.

What You Should Do Instead

Splitting couples should ensure that any planning that they are doing is based on the market rate plus a buffer to account for continued upward rate movement. I would personally add between 0.25% and 0.5% to any rate that they are using for their calculations. I like to refer to it as stress testing. They should know when their plan will no longer be valid. Depending on the market, this could accelerate a decision if a certain housing outcome is key.

Couples who have already split but not yet met any requirements for the disposition of a property need to assess the viability of meeting the requirements. Typically, the marriage settlement agreement will direct a property be dispositioned through sale or refinance within a set period, i.e. 18-months, to pay out equity and get the departing spouse off of title in refinances. This should not mean in 18-months but rather by 18-months. I have seen situations where one spouse wanted to keep the home and buy out their ex, but waited too long to do so. When they went to refinance, rates moved up to sufficiently increase their payment to an unapprovable level.

Even more beneficial would be to get the help of a lender with experience in divorce mortgage lending. There are even certifications to identify these lenders. By connecting with one of these professionals from the start, splitting couples can avoid errors and mistakes with rate assumptions as well as other assumptions about the lending process.

Mortgage Interest Rates Vary

Either way, rates are like any variable in a complex decision and any variables by definition change. When the change is downward, there is less focus because the assumption is that the situation will improve. When they go up, desperate optimism clouds good decision making and reality sometimes takes a backseat to the inevitable. When the difference between a success of the post-split plan can hinge on 0.125% difference in rates, a reality check and inclusion of the appropriate help from trained professionals is just a good idea. Contact us for professional advice on all things real estate.