Should you refinance your home after divorce? Here's what happens to your mortgage after untying the knot

Unless protected by a trust or a prenuptial agreement, all property accrued during a marriage is considered part of a marital estate, or joint property between spouses. This includes your mortgage. 

CNBC Select spoke with divorce expert Amy Colton, a Texas-based Certified Divorce Financial Analyst® and founder of Your Divorce Made Simple, about all things mortgage when untying the knot. 

• What happens to a mortgage after a divorce
• Should you refinance your mortgage after a divorce?
• How to split home equity with an ex
• Tax implications of selling your home after a divorce
• How assuming a mortgage can affect your credit score
• Bottom line

A house is usually the largest asset that a couple has, and thus, it should be one of the first joint properties on the chopping block. 

Divorcing couples have several options for dealing with their marital home. They could:

• Sell the home and split the profits
• Maintain the mortgage jointly and use the house as an investment property
• Relinquish the mortgage to one party

"And if they decide that one party is going to keep it, then they've got to look at 'Can they afford it?'" Colton says. 

Assess your monthly budget and determine if you can realistically afford the mortgage on your own, Colton stresses. A partner who remains in the home will also be responsible for additional housing costs like maintenance and property taxes. The 28/36 rule is a common financial benchmark that advises homeowners to spend less than 28% of their gross monthly income on total housing costs and less than 36% of their gross monthly income toward debt (including a mortgage). 

A partner who stays in the home will likely have to requalify for the mortgage, and the lender will require the borrower to prove that they can afford the home alone. 

Deciding what to do with the mortgage is usually the easy part. Many soon-to-be divorcees think that splitting a mortgage just requires a trip to the courthouse and a couple of signatures, but it's relatively complex. Selling the home is usually the simplest way to wipe your hands clean of the mortgage and your ex, says Colton. 

If one partner wishes to stay in the house, you will need to retitle the property before you alter the mortgage. The partner relinquishing the house must sign a quitclaim deed to remove their name from the title. Only then can the mortgage be resolved. 

Divorcing couples with joint mortgages may choose to remove one of their names from the mortgage, leaving the other as the sole remaining borrower. There are two ways to do this: refinancing or assuming the original mortgage. 

Many post-2008 mortgages do not allow simple mortgage assumptions (removing your co-borrower's name from an existing mortgage). So, refinancing the home in one person's name is the likeliest way to assume a mortgage. 

Refinancing is beneficial if interest rates have gone down since you closed on the house, and often, divorce decrees require the home to be refinanced within a certain time frame, Colton explains. However, mortgage rates have been soaring, meaning your monthly payments could go up significantly if you refinance now.

Luckily, you don't have to refinance immediately after a divorce and divorcing couples sometimes reach other agreements that don't require refinancing at all. Keep in mind, in order to refinance, the spouse keeping the home will have to qualify for the new loan based on factors like their own income and credit score.

Your home's equity is the difference between the current market value of your home and how much you owe on your mortgage. The division of home equity will likely be spelled out in a divorce agreement, and it can yield a useful supply of cash to help each of you settle. 

For example, if your home is valued at $1,000,000 and you owe $500,000 on your joint mortgage, then there is $500,000 of equity in the home, and you and your partner each have $250,000 in home equity, assuming your equity is split evenly. 

"If I'm going to buy it, I've got to give my husband $250,000 from somewhere else," Colton explains. "Do we have assets from somewhere else that I can give him that qualify?" 

You could do this by turning your home equity into cash. To do so, you'll need to take out what's known as a cash-out refinance. This type of loan replaces your original mortgage with a bigger loan, and you are given the cash difference. 

CNBC Select has reviewed dozens of mortgage refinance lenders, most of which offer cash-out refinances, and named Rocket Mortgage as the top choice for cashing out full equity. While most lenders only allow homeowners to cash out 80 to 90% of their home's equity, Rocket Mortgage allows refinancing borrowers with a minimum FICO score of 620 to cash out 100% of their equity. This could give you access to more cash to pay out your ex. And if you're in a hurry to refinance, Rocket Mortgage offers a fast, online pre-approval process. 

Another one of CNBC Select's top-rated mortgage refinance lenders is Ally Bank, which does not charge lender fees — borrowers with Ally Bank are not subject to application, origination, processing or underwriting fees. You'll still have to pay appraisal fees, title checks and a title change (as one party is likely relinquishing ownership of the home).

Home sales are subject to certain federal and state taxes. If you are married and filing jointly, you can sell your primary residence exempt from capital gains tax on the first $500,000 of equity. In contrast, if you get divorced and file as a single, only the first $250,000 of equity is exempt from capital gains tax. 

So, for example, if you bought your home for $500,000 and it's now worth $1,000,000, you have $500,000 in home equity. If you and your spouse split but sell the home before your divorce is final, Uncle Sam will likely let you off scot-free. If you and your spouse divorce, and then one party sells the home as the sole owner, they'll be slapped with a $40,000 tax bill. 

Colton says this is one of the most common mistakes she sees in divorcing couples. 

One of CNBC Select's favorite tax software is TurboTax, an easy-to-use and well-designed service with a variety of plans. Though it's more expensive than other services, certain plans give you access to a live expert, and every TurboTax return is backed by a guarantee.

Missing payments or falling delinquent on any mortgage or loan can severely harm your credit score. On the flip side, making on-time loan payments boosts your credit score.

If you and your ex decide to jointly maintain a mortgage, whether as an appreciating investment or to use the home as a rental property, both of you are liable for negligent payments. So, if your ex misses several payments, even if you correctly pay your share, both of your credit scores will suffer. Similarly, failure to pay the mortgage could lead to default and eventually foreclosure. 

"It's not just mortgages," says Colton. "It's also joint credit cards. Anytime a bill doesn't get paid, you're on the hook for it."

Using a credit monitoring service can help you keep an eye on your credit score with little stress. Experian offers a free credit monitoring service that sends you real-time alerts of any changes to your credit report, making you aware of any missed payments in a timely manner. 

"It's really important to monitor your credit rating during the divorce process to make sure you don't get zinged," added Colton. 

Dividing home ownership is relatively difficult. By amicably weighing your options, creating a post-divorce budget and working with a financial professional, you and your ex-to-be can make calling it splits easier on the wallet.

At CNBC Select, we work with experts who have specialized knowledge and authority based on relevant training and/or experience. For this story, we interviewed divorce expert Amy Colton, a Texas-based Certified Divorce Financial Analyst® and founder of Your Divorce Made Simple.

At CNBC Select, our mission is to provide our readers with high-quality service journalism and comprehensive consumer advice so they can make informed decisions with their money. Every personal finance guide is based on rigorous reporting by our team of expert writers and editors with extensive knowledge of personal finance products. While CNBC Select earns a commission from affiliate partners on many offers and links, we create all our content without input from our commercial team or any outside third parties, and we pride ourselves on our journalistic standards and ethics.

Catch up on CNBC Select's in-depth coverage of credit cards, banking and money, and follow us on TikTok, Facebook, Instagram and Twitter to stay up to date.