The discussion around inflation and interest rates is not going away. While the Federal Reserve is expected to further cut interest rates over the next year, as relevant economic data comes in regularly, no one knows for sure what will happen.
As a family law attorney who works closely with financial advisors to create equitable divorce settlements, I typically address the following issues with my clients in light of this ongoing uncertainty.
Property Valuation and Its Effect on Asset Division
When interest rates drop, borrowing money costs less, making purchasing a home more approachable for many prospective buyers. Some believe this might cause home prices to rise.
That said, the result of a rate drop could be more volatility. With housing markets, like any market, nothing is a given, making timing a house sale to coincide with optimal market conditions difficult.
If you are dividing assets, you should obtain an updated appraisal in light of a significant rate change, even if you already had your home appraised. This way, the value of this divisible asset will be based on its most up-to-date market value.
Availability of Credit
Lower interest facilitates borrowing. Securing more credit can help a divorcing person who wants to buy out their spouse but lacks the immediate funds. It can also help a divorcing person finance the cost of their divorce more easily.
Mortgage Payments
Another benefit of lower interest rates is that mortgage payments will decrease. The reverse is true if rates go up, of course. If rates go down, it can be helpful if you must decide whether to keep the marital home based on affordability. The prospect of a lower mortgage payment can make assuming the marital home more feasible.
When a divorcing couple has already been struggling to pay their existing mortgage due to high interest rates, a decrease in rates could lead to varying analyses of how to divide and offset their assets. In re-evaluating your overall financial picture due to falling – or rising — interest rates, you are more likely to get a real assessment of your situation which will give your more clarity on what to do with this asset.
Refinancing Debt
Lower interest rates mean it would be less expensive to service current debts. As with assets, the lower cost of assuming debt could affect how liabilities are divided in a divorce, impacting a divorce settlement overall.
Investment Income, Spousal Support, and Long-term Financial Plans
Revisiting your short- and long-term financial plans is important as interest rates decrease – or increase. Lower interest rates can affect income earned on retirement savings as well as the value of bonds and other fixed-income investments. In the long term, lower interest rates may contribute to delaying retirement dates.
In the short term, lower investment returns can mean less income to pay obligations in a divorce. For example, the amount and duration of spousal support could be affected by decreases in investment returns or income from savings accounts due to falling interest rates.
If you are the paying spouse, you may have to reallocate your portfolio to garner the funds you would need to fulfill their obligation. Conversely, if you are the receiving spouse who is issued less spousal support than anticipated due to lower interest rates, you may have to find ways to make up for any shortfall in income you may face.
Modification of Existing Agreements
If you are already divorced, changes in the cost of living or a spouse’s financial situation due to changing interest rates could result in requests to modify existing agreements for spousal or child support. Thus, it is important to be thinking about this.
My Final Suggestion …
Please make sure you are working with an experienced divorce attorney, and a financial advisor if necessary, who each understand the finances of your divorce and can advise you in the most beneficial way.