After a divorce, the finances of a formerly married couple -- now two single people -- are very often stressed to the breaking point. Very often, one or both of the former spouses may ask a creditor to restructure a loan to make it easier for the borrower to maintain. The restructuring may take a number of forms, including paying interest only on the principal or a lower rate that stretches out repayment for a longer time.

There are no across-the-board rules about refinancing. Debtors and creditors are free to negotiate new terms and conditions about any form of loan. In this situation, however, the creditor is generally at an advantage. Generally, the cost of financing reflects the value of the collateral, the general cost of money and the credit worthiness of the borrower.

In a divorce, the lender may call the mortgage of the couple. This means the lender may demand that couple, who made the loan as a couple, pay it in full. More frequent, however, is a situation where one spouses buys out the other’s interest in the marital home. When one spouse buys out the other’s share of the house, he or she may wish to keep a mortgage in place and, therefore, try to arrange for refinancing. This can be more difficult because the original loan was predicated on two incomes, or because of dramatic changes in interest rates, or because of financial stress caused by the divorce.

(Sometimes a divorcing couple need not refinance the montage when one spouse buys out the other. Instead the buying spouse indemnifies the selling spouse from any responsibility for the existing mortgage by executing what is called a "release of co-borrower." The lender must approve this arrangement, and not all of them will agree.)

Refinancing and the payment of joint debt may have in an impact on the credit rating of the spouses. Debts in joint names carry joint and several liability. This means the creditor is free to seek repayment from both parties regardless of the terms and conditions negotiated in a separation agreement.

In the next two years, some householders who imagined they could refinance their houses will be singing the blues when they discover they cannot. During the real estate boom, some couples refinanced mortgages as the market value of the houses appreciated. In this routine, they borrowed the appreciation of the home as a loan on their equity. Some of these property owners expected that the value of the houses would continue to appreciate indefinitely. Moreover, many of what are called "sub-prime" borrowers -- people who otherwise would not have been given mortgages because of a bad credit history -- took on adjustable rate mortgages carrying very low introductory rates in the first two years. The borrowers thought that they could refinance after the introductory rates expired because their houses would be worth more. The sub-prime mortgages are now resetting at much higher rates. The borrowers, however, who imagined that they could refinance now face foreclosure because they cannot refinance at rates they can afford. Others face the grim situation called negative equity; that means that the unpaid balance on the loan is greater than the market value of the their houses. Others struggle with a crushing debt burden they simply cannot carry.

Lenders sometimes can be persuaded to refinance because the cost of foreclosure is greater than the amount in question. Lenders, particularly banks, also do not, as a rule, want to be in the real estate business.

Sometimes credit card borrowers who have a good payment history prevail upon the lenders to reduce the interest rate based on their past performance. A debtor who is satisfactorily carrying an large unpaid balance is an ideal credit card customer, and credit card companies do not wish to lose him or her. Conversely, credit card companies routinely hike the interest rate of borrowers who make late payments. Some credit card lenders unilaterally change the terms and conditions if the credit card company discovers that a borrower is having financial difficulties paying other debts.

A debtor should never rely the idea that he or she will be able to refinance at his or her convenience. Business is business, and a creditor who is faced with the appeal of a lender will ask, "What’s in it for me?" Creditors can justly be accused on many things. An excess of sentiment is not one of them.

See also Property Settlement Note; Marital Home.

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