Investor · Minneapolis, MN · Member since 2026 · 17 posts · 3 votes
Looking for ideas on how to make this work. Numbers are roughs, not fully accurate. Trying to help a RE client NOT sell and buy; I don't think he should.
Context:
Home purchased in 2020 with 2.5% first mortgage (currently ~300 owed)
Wife opened 2nd mortgage at 6.5% (currently ~150 owed)
~350k in total equity.
Divorce is in the works. They are looking to sell and both downsize/get new place.
But the best option is to stay, but neither can afford to buy the other out, so they are looking to sell. At least on my client's side, he doesn't have downpayment for new, so he has to sell first. I've been showing them houses and helping them get ready for the sale, but I don't think they should sell it (based on market changes/new pricing) - They'll get a pretty good premium, but payment amounts seem similar to current, so I think 1 should buy the other out. I'm wondering how to make it work?
Can they switch deed tenancy without refi?
Can they make payments to the other with interest for the equity portion?
etc.
What are some ideas to make this a possibility?
The key is that they don't have to requailify for income thresholds, etc. I'm thinking it should be a private deal, but can anyone comment on this?
Good on you for thinking creatively here — selling and rebuying in this rate environment often leaves everyone worse off. A few ideas worth exploring with an attorney and the lender: first, one spouse buying out the other via an owelty lien or a private note for the equity portion is common in divorce settlements, and it can be structured with interest so the departing spouse is compensated fairly. Second, deed changes without refinancing are possible in some cases (quitclaim plus assumption), but the lender's due-on-sale clause and the divorce decree terms control this — a title attorney needs to bless it. Third, that 2.5% first mortgage is gold; most divorce attorneys I see fight hard to keep it intact. Whatever structure you land on, put it in writing and run it past a family law attorney — handshake deals between divorcing spouses rarely end well.
Matthew, this one is actually workable — but only if you keep three things separate in your head, because people mix them up and it causes trouble later: who owns the house, who owes the money, and who gets paid for the equity. Those are three different jobs.
I've been through a divorce myself, so I know firsthand how messy this can get — even when everyone means well. That's exactly why getting this structure right on paper matters so much.
First, deed versus debt. A deed transfer changes ownership, it does not change the mortgage. So yes, one spouse can take sole ownership through a divorce-related transfer, and the other spouse can still be on the hook for both loans until there is a refinance, an assumption, or a payoff. That matters for the departing spouse too, because that debt still counts against them when they go to buy their own place.
Second, the due-on-sale question. Under federal law, a transfer incident to a divorce is generally exempt from a lender calling the loan due solely because of the transfer. That is a big deal here, because it means they may not have to give up that 2.5% first mortgage just to fix the title. It does not erase the debt, it does not release anyone from liability, and the servicer still needs to be told — but it is not the automatic trigger people assume it is. Get a divorce attorney to confirm the exact transfer language for Minnesota, because the paperwork has to match the decree.
Third, the buyout math, and this is where I would slow everyone down. Roughly $350k in equity means roughly $175k to each side if it is split evenly. If the staying spouse pays, say, $1,500 a month toward that equity with no interest, that is about 117 months — almost 10 years — just to pay it off. That is a long time for an ex to wait, and a long time for a house to stay half-settled.
So do not do it as a handshake and a vague "I will pay you back." Put it in a written buyout note, drafted by an attorney, that spells out: the agreed value and valuation date, the interest rate if any, the monthly payment, a balloon or refinance deadline in something like 3 to 5 years, who pays taxes, insurance and maintenance in the meantime, and what happens on a default or a sale. And be precise about rent-for-equity: if the staying spouse is already covering the mortgage, taxes and insurance to live there, only the payment above those housing costs should count as equity credit — otherwise you are double-counting the same dollars.
For what it is worth, I only handle primary-residence lending in Nevada, so if a refinance ever did come up in Minnesota, that would go to my manager Paulo, who is licensed in 49 states (New York excepted). No lender name needed for the idea itself, though — the structure above works whether they refinance in year three or not at all.
Divorce plus a house plus a 2.5% rate is an emotional knot. The cleanest version of this is boring on purpose: one owner on the deed, both names still on the debt until it is formally dealt with, and a written note with a real deadline for the equity. That protects the person staying and the person leaving.
To me its the question of: "Can he afford to keep up on the current payments + what is owed...?" Its not a friendly separation, but I think both want whats best for the kids too. I want to help him out, even if it means I don't land the list agreement. I would never give it up unless forced....
If I set up a meeting, what specific information is missing to help manage this decision?
Matthew, I think you're looking at the right problem here. With a 2.5% first mortgage and that much equity, selling the property may not necessarily be the best answer.
One tax angle I'd look at before deciding is whether the spouse buying out the other can structure the transfer as part of the divorce rather than treating it like a normal third-party sale. Transfers of property between spouses or former spouses that are incident to divorce generally have different tax treatment, including carryover-basis rules.
I'd also separate the home's equity from its actual taxable gain. If they've lived there as their primary residence, the home-sale exclusion could be an important part of the analysis if they ultimately sell.
As for the idea of one spouse making payments to the other with interest, that's something I'd have the CPA and divorce attorney model together. The tax treatment, existing mortgage, security of the note, and terms of the divorce agreement all matter.
I'd run the numbers on three scenarios: sell, refinance/buy out, and a structured buyout with seller financing. Compare the after-tax cash available to each spouse rather than just looking at the monthly payment.
This is one of those situations where the right structure could be worth considerably more than simply finding another house. Happy to connect!
