How Do I Preserve Equity in My Home During a Divorce?
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Most people go into a marriage hoping it will last for a lifetime. Unfortunately, relationships can go bad, and you may find yourself dealing with the dissolution of your marriage. During a divorce, two people have to create separate lives out of a former partnership. This includes making tough choices about how to split a jointly owned home.
Preserving your share of home equity may be critical to your financial future. When deciding what to do with your house in a divorce settlement, there are several items to consider.
Why is home equity so important in a divorce settlement?
For many Americans, their home is their largest financial asset. U.S. homeowners have an average of $197,500 in home equity, according to the Federal Reserve Board’s 2016 Survey of Consumer Finances. Home equity is the value of the home minus the value of the debt on the home. With so much money tied up in a family home, deciding what to do with it has major implications for divorcing couples.
During a divorce, both spouses will want to preserve their equity. And dividing home equity can be complicated. For one, the divorcing couple needs to decide whether they will keep or sell the house. If one person keeps the house, they will have to figure out how to compensate the other person for their share of the equity.
Determining financial priorities in a divorce
You won’t get a “do-over” after your divorce settlement, so it’s critical that you make informed choices during the process. Being clear on your financial priorities will make splitting the family home easier. When it comes to preserving home equity, here are a few things to keep in mind.
See if you can afford to keep the house
Many people, especially those with young children, want to hold onto the family home following a divorce. If you hope to keep your home, you need to know whether you can afford it. Ryan Firth, CPA and founder of Mercer Street, a Bellaire, Texas-based accounting firm, told LendingTree that “the first priority is to determine if a client can afford to keep the house on his or her income only.”
Along with affording the monthly mortgage payments and maintenance, the ex-spouse who keeps the house may have to “buy out” equity from their ex-spouse. The ex-spouse keeping the house can either give up assets worth half the home equity, or take out a new mortgage loan with their income alone. The new loan will have to cover the balance of the existing mortgage plus the money paid out to the former partner.
On top of mortgage payments, you’ll need to consider other costs of owning a home, such as insurance, maintenance and property taxes.
Unfortunately, in many cases, keeping a house won’t be in your budget. Laurie Itkin, a San Diego-based certified divorce financial analyst and founder of financial planning company The Options Lady, told LendingTree, “Quite frankly, in most cases, it makes sense to sell the house.”
Yves-Marc Courtines, a certified financial planner with Boundless Advice in Manhattan Beach, Calif., said most of his clients cannot afford a house on their own. “In rare cases,” Courtines said, “the current spouse may have the financial wherewithal to not downsize.”
The decision to downsize is rarely an easy choice, but it’s often the most prudent.
Amy Blacklock, Detroit-based owner of WomenWhoMoney.com and a stay-at-home grandmother, made the difficult choice to downsize after going through a divorce in 2011.
“It’s hard to leave a family home, but the memories stay with you, not with the house,” Blacklock said.
Make a plan for your future
Even if you can technically afford a new mortgage, it may make more sense to give up the house and take a cash settlement instead.
For one, you may be able to invest the cash settlement while you find a low-cost way to live. That’s the path Kristen Edens took when she divorced in 2009. Edens, a 55-year-old writer based in St. Louis, knew she wanted to leave her former home in Utah, so she willingly allowed her ex-husband to stay in the house.
He had to take out a mortgage on the paid-off home to give Edens her fair share of the equity. Edens was then able to move onto a family member’s property, where she did upkeep in exchange for a free place to live. This freed her up to invest the money from the divorce settlement in the stock market.
On the other hand, homeownership may still be important to you. In that case, you may choose to use cash for a down payment on a new home.
Blacklock gave up home equity during her divorce settlement, but this allowed her a larger cash settlement. She was then able to put a down payment on a smaller home.
“I didn’t want to go from a 4,000-square-foot home to an apartment, so I decided to buy a house right away,” Blacklock said. “[The decision] paid off, since I bought a foreclosed home and did some updates.”
Negotiate a fair settlement
Whether you decide to keep your house or to take your share of the equity in cash, it’s important to negotiate a fair divorce settlement. The settlement will involve splitting up many financial assets, including your home equity. These assets will help you restart your financial life.
During the settlement, you will want to be sure that you or your ex-spouse continue paying all your joint bills. This will allow you to keep your credit intact during the divorce proceedings. Following the divorce, you can start rebuilding your financial life.
Ways to handle homeownership in a divorce
Divorce settlements require you to think about both the home and the mortgage against the house. Below is a recap of the options a divorcing couple can consider if they have substantial equity in the house.
Sell the home
When you have substantial equity in your home, selling the house may make sense for both people. Selling allows you to split the cash from the sale of the home. “We are fortunate to be in a period of time in which most houses have gone up in value over the past few years,” Itkin said. “After paying off the mortgage and closing costs, most couples with whom I work are walking away with cash.”
Buy out the other spouse
If you want to stay in your house, you’ll probably need to buy out your other spouse. Unless you’ve got enough assets to cover your ex-spouse’s share of the equity, this will mean taking out a new mortgage.
Itkin advises all divorcing couples to be careful before deciding to buy out their ex-spouse. Before making the decision, Itkin tells clients to be sure “they are not sacrificing their retirement assets, they have the income to afford the house and they are certain they can qualify to refinance the mortgage in their own name.”
Before planning to buy out your ex-spouse, compare offers for mortgage refinances from LendingTree. A loan officer will help you determine whether you can afford to refinance on your own income.
Allow your ex-spouse to buy you out
If you don’t want to stay in the house, but your ex-spouse does, you can let them buy out your equity. Before deciding on how much to request in the divorce settlement, you’ll want a professional home appraisal.
During her divorce, Edens’ ex-husband bought her out from the home they had remodeled together. To do this, he had to take out a new mortgage on their fully paid-for home.
“I gave up the house that I had put a lot of sweat equity into,” Edens said. “But I didn’t leave my share of the equity behind.”
The bottom line
No matter what you decide to do with a house, preserving your home equity during a divorce is critical to your financial future. During your divorce settlement, make a point to negotiate for your share of home equity. A fair share of equity will give you a boost as you embark on your new life.