Cash-out vs. owelty: which refinance keeps the house?
When one spouse keeps the home in a divorce, there are usually two jobs to do: pay the other spouse their share of the equity, and get their name off the mortgage. A refinance handles both, but the type of refinance matters.
The cash-out route
With a cash-out refinance you take a new, larger loan and use the extra cash to pay your spouse. Most conventional and FHA cash-out loans cap you at 80% of the home's value, and cash-out pricing is often higher.
The equity buyout (owelty) route
Many loan programs let a buyout required by a divorce decree be treated like a rate/term refinance instead. That often allows a higher loan-to-value and better pricing. In Texas, this is commonly done with an owelty of partition lien, which your attorney sets up as part of the divorce.
A quick example
Say the home is worth $450,000 and owes $280,000. Equity is $170,000, so a 50/50 split means an $85,000 buyout. Add about $12,000 in closing costs (title, underwriting and other third-party fees) and the new loan needs to be about $377,000.
- Cash-out: 80% of $450,000 is $360,000, about $17,000 short.
- Equity buyout at 95%: up to $427,500, which covers it.
Same house, same people, same credit. The structure is what changes the answer. Try your own numbers.
The takeaway
Get a mortgage professional involved before the decree is final. Eligibility depends on the program, title history and exact decree wording, and those details are much easier to get right on the first draft.
Educational only. Not legal or tax advice, and not a commitment to lend. Programs and guidelines change.
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