Avoiding Financial Pitfalls in Divorce: The Rise of Buyout Loans

Divorce is never just about emotions—it’s also about finances. In 2025, as divorce rates remain steady and housing costs continue to rise, more couples are finding themselves stuck on one big question: What happens to the house?

For many, selling the family home feels like the easiest solution, but it can also come with losses, tax implications, and emotional strain. That’s why buyout loans have been growing in popularity. They give one spouse the ability to keep the home by refinancing and paying the other spouse their share of the equity.

But how do buyout loans work, and can they really help divorcing couples avoid costly financial mistakes? Let’s explore.

What Is a Buyout Loan?

A buyout loan is essentially a refinance option created for divorcing couples. Instead of selling the house and splitting the proceeds, one spouse refinances the mortgage in their own name, takes on the debt, and uses the equity in the home to buy out the other’s share.

Example:

• Home value: $400,000
  
  
• Remaining mortgage balance: $200,000
  
  
• Equity: $200,000
  
  
• One spouse wants to keep the house, so they refinance into a new mortgage for $300,000.
  
  
• They use $100,000 from that refinance to pay the other spouse, while keeping the home.

This approach prevents forced sales and gives stability, especially if children are involved.

Why Buyout Loans Are Rising in 2025

Several factors are fueling this trend:

1. High Home Equity – U.S. homeowners currently hold $11.5 trillion in tappable equity (CoreLogic, 2025). This equity allows divorcing couples to structure buyouts without selling.
   
   
2. Mortgage Rate Shifts – With rates dipping closer to 6.5%, refinancing is becoming more affordable again.
   
   
3. Housing Supply Pressure – Selling during a low-inventory market often means overpaying for the next home. Keeping the current property is more practical.
   
   
4. Emotional Stability – Many couples with children prefer not to move, making buyout loans an attractive choice.

Financial Pitfalls of Divorce Without a Buyout Loan

Divorcing without considering a buyout loan can create long-term financial challenges:

• Forced Sales at Bad Times – If home prices are down, selling immediately may mean losing tens of thousands in potential equity.
  
  
• Tax Implications – Some sales can trigger capital gains taxes if not handled carefully.
  
  
• Housing Instability – Both spouses may struggle to find affordable housing in today’s market, especially with higher rents.
  
  
• Credit Damage – If the mortgage remains in both names post-divorce and one person misses payments, both credit scores suffer.

How Buyout Loans Help Couples Stay Financially Stable

Buyout loans are designed to avoid those pitfalls:

• Equity Unlocking – One spouse gets their share of equity without forcing a sale.
  
  
• Single Borrower Responsibility – Refinancing removes the other spouse’s name from the loan, protecting credit.
  
  
• Tax Efficiency – Properly structured buyouts may reduce exposure to capital gains.
  
  
• Lower Stress – The spouse keeping the home avoids moving, while the other spouse walks away with cash to start fresh.
  

Data Point Snapshot

• 34% of divorced homeowners in 2024 chose refinancing options instead of selling, according to an American Housing Survey.
  
  
• Average U.S. home equity available for buyout transactions is $185,000 per household in 2025.
  
  
• Refinancing costs are down 8% year-over-year, making buyout loans less expensive to set up than in previous years.

Key Considerations Before Choosing a Buyout Loan

While useful, buyout loans require careful planning:

• Income Requirements – The spouse keeping the home must qualify for the new mortgage independently.
  
  
• Appraisal Value – An updated appraisal determines equity, which may surprise one or both parties.
  
  
• Closing Costs – Refinancing usually involves fees of 2%–5% of the loan amount.
  
  
• Long-Term Affordability – Keeping the home should make sense for the budget, not just the emotions.
  

FAQs

1) How does a buyout loan differ from a standard refinance?

A buyout loan is a refinance done specifically during divorce. The loan amount is structured to both pay off the old mortgage and release equity to pay the departing spouse. It ensures only one spouse is responsible for the mortgage going forward.

2) What credit score do I need for a buyout loan?

Most lenders require a minimum score of around 620–640 for conventional refinancing, though better rates often start at 680+. FHA loans may allow slightly lower scores, but income and debt-to-income ratios are just as important in qualifying.

3) Are buyout loans always cheaper than selling the house?

Not always, but in many cases yes. Refinancing fees usually total 2–5% of the loan, but avoiding real estate commissions of 5–6% from selling can save thousands. It also preserves home stability, which many families consider invaluable.

4) Can both spouses remain on the mortgage after divorce?

Technically yes, but it’s risky. If one person misses payments, both credit scores are impacted. Buyout loans solve this problem by refinancing into one spouse’s name, providing financial separation and reducing long-term disputes.

5) Is a buyout loan the best choice in every divorce?

Not always. If the spouse keeping the home cannot qualify on their own, or if equity is low, selling might be the better option. The key is running the numbers—sometimes a buyout makes sense, other times splitting the proceeds is smarter.

Final Thoughts

Divorce is never easy, but financial stability during the process makes a world of difference. Buyout loans offer couples a way to protect equity, preserve stability, and avoid the pitfalls of rushed sales or shared debt after separation. For those navigating divorce in Michigan, Midwest Mortgage can help guide you through buyout loan options with care and expertise.

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