Should one or both spouses be on a mortgage? What are the pros and cons of each approach?
We closed on a refinance 2 days ago, so I have one more day to cancel. My question concerns having one spouse's (vs. both) name in the mortgage: I didn’t really want both our names on the mortgage because I didn’t want for both of us to incur the debt obligation. The lender, of course, would love to have as many names to hold liable as possible. So anyway, the loan is in my name and because I’m a generous kind of guy, the deed remains in both our names. There are a few advantages to this approach (I think): - the spouse is removed for the home’s financial obligation, yet retains ownership for legal purposes - fewer obligations for the spouse equates to more credit to make additional purchases (she’d have a *zero* debt to income ratio) - if something unforeseen happens to either of our credit rating (identity theft maybe), the one of us would not bring down the credit of the other - if the case of divorce, having one name on a mortgage would simplify the asset negotiations (having both names in a loan would pretty much require a home sale or refinance to get the mortgage under one person) What are the disadvantages? This part I am afraid I have not really thought out. - if I die, then a refinance would be mandated unless the surviving spouse is able to assume the mortgage (subject to the lender approval) - what are other considerations and disadvantages?
I agree with your analysis of the pros and cons of putting one name on a mortgage. In general, if a couple qualifies for a mortgage with only one person, the couple will have much more flexibility when dealing with unforeseen financial setbacks or divorce. The language I use to express it is this: Make one spouse a financial and credit history life boat. If a couple's financial world is turned upside down one spouse will have a strong credit history to rely on. As you mentioned, if there is a divorce usually one person will want the marital residence. If both names are on the mortgage, there is a 100% chance of a refinance or sale to split the asset. If one name is one the home there is a 50% chance of a refinance.
You asked for other considerations and disadvantages.
1) You mentioned you live in Colorado, which is a common law state regarding marital property. Readers in the 10 community property states may have a more complicated analysis.
2) Consider life insurance for both spouses with a benefit that is greater than the balance of the mortgage. In the event of one spouse's death, the surviving spouse will have cash available to retire the debt completely or pay down a substantial amount of the balance to refinance at a fraction of the property's value.
3) Put the property title in a living trust. Upon the death of a spouse, the property's ownership will pass to the beneficiary without going through the probate process. This can save the surviving spouse a large amount in taxes. However, the tax benefit varies by each situation and state law. Therefore, consult with an attorney experienced in estate planning to discuss putting the property in a trust.
4) Both spouses should get wills or update their wills if their circumstances have changed since their wills were written. Clarify the disposition of the residence if the property is not in a trust.
Conclusion
I agree with your plan to refinance with one spouse on the mortgage. Your work is not complete, however. As I mentioned, consult with an attorney with estate planning experience to put a more complete plan in place for handling your assets.
I hope this information helps you Find. Learn & Save.
Best,
Bill