An equity buy-out refinance in a divorce is a financial arrangement that allows one spouse to retain ownership of the marital home, by buying out the other spouse's share of the property's equity. This is a common solution when divorcing couples want to avoid selling the property and one party wants to keep it.
Here's how it works:
Value: Determine the current market value of the property. This can be determined through a professional real estate appraisal or by mutual agreement.
Equity: The equity in the property is the difference between its current market value and the outstanding mortgage balance. For example, if the house is worth $300,000, and there is a remaining mortgage balance of $150,000, the equity is $150,000.
Buy-Out Terms: Once the value and equity are determined, the divorcing couple come to an agreement on the terms of the buy-out. This includes how much one spouse will pay to the other to buy out their share of the equity.
Refinancing the Mortgage: To facilitate the buy-out, the spouse who wishes to keep the property (the "buying spouse") typically needs to refinance the existing mortgage. This involves applying for a new mortgage loan in their name alone or with a co-signer, if necessary. The purpose of this new loan is to pay off the old mortgage and provide the funds to buy out the other spouse.
Payment to the Other Spouse: Once the new mortgage is approved and the funds are available, the buying spouse can use them to pay the agreed-upon amount to the other spouse. This amount should cover the other spouse's share of the equity in the property.
Transfer of Ownership: After the buy-out is complete, the property's ownership is legally transferred to the buying spouse, and they become the sole owner of the property.