Navigating HELOCs in a Divorce Settlement

Divorce is stressful and painful in many ways, and deciding how to pay out your home equity to your spouse doesn’t make it any easier.

You likely have a mortgage rate in the 2-3% range if you bought or refinanced before early 2022. You don’t want to sell the house, pay fees, then buy again at 7% or more.

And doing a cash-out refinance would more than double your mortgage rate.

That’s why many divorcing couples are turning to home equity lines of credit, or HELOCs.

How can a HELOC help with my divorce?

The beautiful thing about a HELOC is that you leave your primary mortgage intact while tapping into needed equity. 

Here’s why that’s important.

When you divorce, the court could tell you that the spouse is entitled to 50% of the existing equity from the family home.

For instance, if you have a home worth $500,000 and a $200,000 mortgage balance, the home has $300,000 in equity.

The court might say each spouse is entitled to $150,000 of that. It seems equitable, but getting that $150,000 in cash is difficult. You have two not-so-great options:

You could sell the home: But then you lose about 10% of the home’s entire value to agent commissions and other fees. Then, you and your ex-spouse have to buy again, incurring high mortgage rates and more closing fees.

You could do a cash-out refinance: But you might more than double your interest rate from 3% to 7%+.

If those two options are off the table, it’s time to turn to a HELOC. With a HELOC, you can tap into up to 100% of your home’s existing value. Here’s how.

Should you get a HELOC for a divorce payout?

In the example above, we have a $500,000 home with a $200,000 mortgage on it. There’s $300,000 in equity.

You open a new HELOC for 50% of the equity ($150,000) very quickly and with few closing costs. In a matter of weeks, you could have the cash for the payout.

The HELOC is placed on top of your existing first mortgage. That’s why these are often called second mortgages. Your first mortgage does not change in any way. 

What if I don’t have a lot of equity in the home?

As mentioned, there’s a way to get up to 100% of your home’s equity with a HELOC. 

There’s a credit union in almost every state that offers 100% LTV HELOCs. 

So, let’s say you have a $300,000 house with a $250,000 loan on it. That’s $50,000 in equity and the court says your spouse is entitled to $25,000.

That would bring your total of all loans up to $275,000, or 92% loan-to-value. This is where the HELOC really shines. No lender will give you a cash-out refinance up to 92% LTV. But many HELOC lenders will.

So even if you have little equity in the home, there’s a good chance a HELOC can help with the divorce settlement payout.

Example equity and payout situations

Here are examples of how the HELOC strategy could play out. This assumes a 50% split of home equity, but your court ruling may be different.

Example HELOC payment

Example home equity loan (HEL) payment

Consider a home equity loan instead of a HELOC

HELOCs are more attractive when rates are low.

These loans are variable and based on the prime rate. At time of this writing, the prime rate was 8.25%. Prime rate moves up with the Federal Reserve raises its key interest rate.

Currently, the Fed is on a warpath to fight inflation. Though it has backed off its aggressive rate-hiking strategies, it still may hike rates by 0.25% or more over the coming months. So a HELOC with a rate of prime + 0.25% would be 8.5% today but could be 8.75-9% by year’s end.

But many lenders offer a home equity loan or HEL for short. What the HEL is that, you ask?

It’s like a home equity line, but it a fixed sum and comes with a fixed rate. You’ll pay a higher rate for the fixed loan, but it removes the risk of a skyrocketing HELOC rate.

But don’t abandon the idea of a HELOC. Most lenders allow you to lock in a portion or all of the HELOC after closing. Check with your bank or credit union on their rules about a post-closing lock.

How to know the value of the home

In the process of getting the HELOC, ask the lender if they do a full appraisal. If they do, there’s likely an approximate $500 fee for it. While that’s a downside, the good news is that you’ll have a 3rd party professional opinion of the house value.

Sometimes, though, the HELOC lender won’t order an appraisal. They’ll use an AVM – automated valuation model. These are not always accurate.

In these cases, you can agree on the AVM value, or a different value that you’re both comfortable with.

Another option is ordering your own appraisal.

Most people never spend money on an appraisal unless they are getting a loan and it’s required by the lender. But you can order your own appraisal. Just do a quick Google search for an appraiser in your area.

Pros and Cons of a HELOC for divorce

Pros of a HELOC for divorce payout

• Get up to a 100% combined loan-to-value
• Avoid agent commissions and fees that come with selling the home
• Don’t have to buy again at higher rates
• Avoid losing your current low primary mortgage rate
• You may be able to lock in a rate after closing

Cons of a HELOC for divorce payout

• A HELOC doesn’t remove the spouse’s name from the 1st mortgage. 
• You’ll have to qualify for the 1st and 2nd mortgage payments when applying for the HELOC
• HELOCs come with variable rates which are rising

Divorce payout HELOC FAQ

See if a HELOC for a divorce payout is right for you

HELOCs won’t always work for a divorce payout, but they are the best option in many cases.

The best way to find out is to check your HELOC or home equity loan eligibility.