When High Mortgage Rates Block The Exit

Current mortgage rates play havoc with homeowners who want to split up. The first Monday after New Years is believed by many family practice attorneys to be their busiest day of the year, so they call it “Divorce Monday.” But the mismatch between current mortgage interest rates and the rate at which many homeowners refinanced a few years ago may reduce divorce filings. Yes, breaking up is hard to do.

The present challenge that home ownership makes for couples trying to split up was pointed out to me by Donna Cates, a Certified Divorce Financial Analyst, in an email exchange. She explained that when a couple buy a house, they usually both sign for the mortgage and thus are both responsible. If one person stays in the house after divorce, the other is still liable for the debt. That is, if the occupant does not make the mortgage payments, the other person who signed the mortgage is on the hook for the entire amount due, even if they divorced years ago and the other person does not live in the house. A divorce agreement that only one of them pays the mortgage will not prevent the lender from coming after both of them in a default.

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If one person keeps the house, the other person will likely demand that the mortgage be refinanced in the current occupant’s name only. That relieves the other person of any legal liability for the debt. But many mortgages were taken out below four percent interest, not today’s rate of around seven percent.

Recent statistics show 58% of mortgage value outstanding is at interest rates below four percent, with another 15% between four and five percent. For example, a typical mortgage at the end of 2020 was 2.7%. On a loan balance of $400,000, that resulted in monthly payments of about $1,600. As of this writing, a typical mortgage rate is 7.0%. On the same loan balance, the monthly payment would be $2,660, a whopping thousand dollars a month more than the old payment. And Cates points out that the payment would come from just one person’s income. That could put the kibosh on keeping the home.

Another solution for the divorcing couple is to sell the house, divide the proceeds, and each go their own way. This is the cleaner solution. But either partner who wants to buy another house will be facing today’s current mortgage rate, having walked away from the sweetheart deal they made a few years ago.

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Strong price appreciation in recent years helps the owners. If they sell, they will likely pull out much more cash than they put in. But that also means they will have to pay more for another house. And even if one person rents, apartment lease rates have risen 20% in the last four years, whereas that old mortgage payment stayed the same.

Working through the homeownership challenge may keep some people together. In general, the economy has only a small impact on divorce rates, with general social and demographic trends driving most changes. But the evidence shows that a good economy does increase divorce rates a little. An old bad joke has a husband asking his wife, “What do you want for your birthday?” The wife replies, “I want a divorce.” The husband thinks for a minute, then says, “I wasn’t planning on spending that much.” In fact, stronger incomes enable two people to live apart when that is their preference.

Couples looking at their finances in January 2025 will generally see a strong job market and wages rising faster than inflation (which was not true two years ago). In most cases, their total wealth will have increased thanks to rising real estate values and big gains in investment accounts. But today’s relatively high mortgage interest rates will be with us all year.

That’s just an average, of course, and there are still people in difficult financial straits. Rosalind Sedacca, a child-centered divorce coach, pointed out to me in an email conversation that unemployment often leads fathers to want 50-50 custody rather than turning primary custody over to the mother. That preference lowers the cost of child support, which is particularly important for an unemployed person or one working at a low-wage job.

The economist looking at divorce in 2025 comes to two conclusions. First, the current economic conditions may lead to more divorces for low-income families. Second, the relatively high mortgage interest rates will lead to fewer divorces for home-owning couples.