Real Estate & Divorce Blog: Handling Second Mortgages and HELOCs in Divorce

What Are Second Mortgages and HELOCs?

Before we dive into how they are treated in a divorce, let’s first define what a second mortgage and HELOC are:

• Second Mortgage: A second mortgage is a loan taken out against the equity in your home that is subordinate to the primary mortgage. It’s a way for homeowners to access cash, often used for home improvements, debt consolidation, or other financial needs.

• HELOC (Home Equity Line of Credit): Similar to a second mortgage, a HELOC allows homeowners to borrow against the equity in their property, but it operates more like a credit card. The borrower can draw from the credit line as needed and is required to make monthly payments based on the outstanding balance.

Both of these loans are secured by the home itself, meaning if the loan is not repaid, the lender can foreclose on the property.

How Are Second Mortgages and HELOCs Treated in Divorce?

When it comes to dividing marital property and liabilities during a divorce, the treatment of second mortgages and HELOCs depends on several factors:

1. Debt Division

Like any marital debt, second mortgages and HELOCs must be accounted for during divorce proceedings. Typically, the court will determine whether these debts were incurred for the benefit of the marriage or for one party’s personal benefit. If the loan was used for joint purposes—such as home renovations or paying off other debts—it is generally considered marital debt.

However, if one spouse took out the second mortgage or HELOC solely for personal reasons (e.g., to fund a business or other individual expenses), the court might assign responsibility for the debt to the person who incurred it.

2. Refinancing and Liability

If the home is to be sold, the proceeds from the sale will first go toward paying off the primary mortgage and any second mortgages or HELOCs. However, if one spouse is keeping the home, they may need to refinance the property to remove the other spouse from the loan. This is often easier said than done, especially if the spouse keeping the home cannot qualify for refinancing on their own due to income or credit score issues.

It’s important to note that even if one spouse is removed from the deed or ownership of the home, they may still be held responsible for the loan if their name is on the mortgage, second mortgage, or HELOC.

3. Home Equity Division

If a second mortgage or HELOC was used to fund home improvements or other expenses that increased the home's value, the equity in the property needs to be properly assessed. In some cases, the spouse keeping the home may need to compensate the other spouse for their share of the home’s increased value, especially if the HELOC or second mortgage contributed to improvements that added to the home's market value.

4. Selling the Home vs. Keeping It

For divorcing couples, there are typically two main options when dealing with a home with a second mortgage or HELOC:

• Selling the Home: If you choose to sell the home, the proceeds will go toward paying off both the primary mortgage and any second mortgage or HELOC. Any remaining funds will be split between both spouses as part of the divorce settlement. However, if the home is underwater (meaning the total mortgage debt exceeds the home’s value), the spouses may need to negotiate a way to handle the deficiency.

• One Spouse Keeping the Home: If one spouse wants to retain the home, they will need to work out a financial agreement to compensate the other spouse. This could involve paying the other spouse their share of the equity or refinancing the mortgage to remove their name from the debt. If there’s a second mortgage or HELOC, this could complicate the refinancing process.

Tips for Handling Second Mortgages and HELOCs During Divorce

1. Get a Professional Property Valuation: A professional appraisal is essential to determine the current market value of the home, especially if there’s a second mortgage or HELOC in place. This will give both spouses a clearer idea of the equity and the amount of debt involved.

2. Understand the Terms of the Second Mortgage or HELOC: Before making any decisions, review the terms of both the primary mortgage and any second mortgages or HELOCs. Pay attention to interest rates, monthly payments, and any penalties for early repayment. Understanding the fine print can help avoid surprises down the road.

3. Consult a Real Estate Expert: If you’re unsure about the best course of action regarding real estate, it’s wise to consult a real estate expert or financial advisor. They can provide insight into how to handle the home’s sale or refinancing, as well as offer advice on potential tax implications.

4. Negotiate Fairly: Dividing real estate assets and liabilities can be emotional, especially when a home holds significant personal or financial value. However, it’s important to negotiate fairly and try to reach a solution that benefits both parties. If you’re keeping the home, make sure you can afford the ongoing mortgage payments, including any second mortgage or HELOC responsibilities.

5. Consider the Future Impact: The decision to keep or sell the home may have long-term financial implications, especially if there are second mortgages or HELOCs involved. Make sure you’re not taking on more debt than you can handle and consider how this decision will affect your financial future.

Final Thoughts

Dividing second mortgages and HELOCs during a divorce can be a challenging process, but with careful planning and clear communication, it is possible to find a fair and equitable solution. Whether you're selling the home, refinancing, or dividing the debt, it’s important to understand your rights and responsibilities. Working with financial experts and legal professionals can help ensure that your divorce settlement reflects both your immediate and long-term financial needs.

If you’re facing the complexities of real estate and divorce, consider consulting a real estate professional who specializes in divorce-related property issues to guide you through this process.