When it comes to assets in a divorce, the two biggest decisions are the house and the retirement. What do you do with the house in a divorce? I have some thoughts…
Sell
The easiest option to deal with the house in a divorce, is to sell the house. This accomplishes who gets the house (i.e. no one), it addresses the value, and it gets the equity to the parties.
I’ll be honest, I love it when my clients sell the house in their divorce. It makes everything super clean… financially and emotionally. No one gets the emotional advantage of the house in the divorce and everyone gets paid.
And.. to be just as honest, the problems with selling the house in a divorce are substantial.
First, it’s work… a lot of work if you want to maximize the dollars and minimize the time on the market. The sale of a house is not easy on any marriage, but especially on a marriage that is crumbling through a divorce. A divorce puts both parties in an emotional hell and doing the work (fix the railing, paint the inside, deep clean, remove half the furniture, kennel the dog) to sell a house is, frankly, too much for some to handle… especially in a divorce.
If one spouse doesn’t have the emotional or physical capacity to do the work of the sale of the house, then the burden to get the house ready for sale during the divorce falls onto the shoulders of the other spouse, which is not fair.
Divorce isn’t fair.
The second problem with selling the house in a divorce is the financial burden of the new interest rate (if you are buying another home). As I write this in April 2024, the interest rates are 7.6% for a 30-year fixed rate. Most of my clients have sweet rates of 2.5% – 4% on their current home. With three – four interest rate points difference, that’s a $200,000 difference in buying power! It also shows-up as a several hundreds dollars per month increase in the monthly mortgage payment.
Divorce isn't fair
The second problem with selling the house in a divorce is the financial burden of the new interest rate (if you are buying another home). As I write this in April 2024, the interest rates are 7.6% for a 30-year fixed rate. Most of my clients have sweet rates of 2.5% – 4% on their current home. With three – four interest rate points difference, that’s a $200,000 difference in buying power! It also shows-up as a several hundreds dollars per month increase in the monthly mortgage payment.
If you are keeping score, the option of selling the house in a divorce is emotionally and financially clean, but it comes at a cost of the emotional and physical labor of selling and moving, and, if you are buying a new house (post-divorce), then a higher interest rate, too.
Ways to keep the house in a divorce
When looking at all the options for keeping the house in a divorce, there are two primary areas to discuss: possession and equity. Let’s address the equity first because it leads to the discussion of possession.
The real market value is the value a disinterested third party would pay for your house. If you live in either an urban or suburban area, then Zillow’s zestimate is generally accurate. If you live in a rural area or have acreage then Zillow’s zestimate may or may not be accurate. For rural areas, I find that the zestimate is worthless.
Other ways to obtain your house’s real market value is to hire a real estate broker to provide you with a comparative market analysis, which is called a CMA. CMA’s are typically free because the broker is hoping that even if you don’t sell the house tomorrow, you will keep them in mind for the future sale. CMAs typically only take a week and they are free.
The platinum standard to determine your house’s value in a divorce is to hire an appraiser. This service is typically between $700 – $1,200 and generally takes several weeks. Divorce courts love appraisals.
Your house’s real market value is not the “real market value” listed on your tax statement. Your tax statement’s “real market value” is an algorithm pursuant to statute. It has no bearing upon what a disinterested third party will pay for your home.
Your mortgage balance is your principal pay-off balance. Just call your mortgage lender or look at your statement to get this information.
Now, just plug the numbers into the formula and, viola, you know your house’s equity in a divorce.
Once you know the equity, then the next question is how to split the equity?
Some couples have other assets to off-set the equity, but in truth, most do not. For our purposes, we will presume you need an option to pay your spouse equity in your divorce.
If a couple is not selling the house in their divorce, then most couples use either a refinance, a home equity line of credit, or a balloon payment at a later date to get equity to the ex-spouse.
Keep in mind, if both parties are on the house’s mortgage, then in addition to the equity payment, we also need to get the other party off the mortgage. This can only be accomplished in one of four ways: refinance, assume, sell, pay-off.
A refinance – you know this one. The problem is that you are likely refinancing a loan with a low interest rate to a higher rate AND you are refinancing the principal pay-off amount plus half of the equity. Both the higher interest rate and the increased loan value make the monthly payment much higher than your current mortgage.
The primary reason most people elect to refinance the house in a divorce is to get the other party’s name off the loan AND to wrap-in the equity payment.
A partial solution is to push-out the loan’s duration to a 30-year loan. Is it a poor financial decision? Yes. Is it one of the few ways you will get the equity payment to your ex-spouse with a monthly payment you can afford? Also, yes.
Divorce isn’t fair and it messes with your finances, too.
Some folks use a home equity line of credit, we call them HELOCs, which is essentially just a second mortgage, to pay their spouse the owed equity to them from the house in a divorce. The benefit of the HELOC is that the monthly payment is (generally) affordable. The secondary benefit to adding a HELOC to your existing loan is that you are keeping your original loan’s interest rate and pay-off date.
The disadvantage to the HELOC is that you will endure your current monthly mortgage payment AND the monthly HELOC payment.
A HELOC is a good option to get equity to the other party when you have assumed the first mortgage.
Finally, some couples agree to a balloon payment, which is a full equity payment due at a later date, as a way to get equity from the house in a divorce to the other party. For instance, if the equity payment due to the ex-spouse is $250,000, then some couples will attach a Trust Deed (which is fancy legal language for a lien on the property) that states that spouse A will pay spouse B $250,000 by XYZ date with, or without, interest.
The balloon option is risky, even with a lien. Many things can happen that prevent the balloon payment from happening. You might be thinking, “Julie, don’t be such a drama queen. It’s a small risk.” Yes the risk is low, but it is a risk that can be mitigated by using the other options.
What are the reasons a couple typically uses the balloon payment option in a divorce with a house?
When the original loan is assumable, then couples may elect to use a balloon payment. You might be thinking, “Julie, you are killing me. What is an assumable loan? My brain is hurting.”
I got you. But first, go to your pantry and grab a handful of chocolate chips. The serotonin boost will make it temporarily better. You are going to burn the calories from the divorce. Pinky swear.
An assumable mortgage is a mortgage that allows a party to qualify for the exact terms of the current mortgage (i.e. the interest rate, the principal, the monthly payment, etc.).
Ask your current mortgage lender if your loan is assumable. If it is, that means that as long as you alone can qualify for your current loan, then you can assume the loan’s interest rate, which is very likely much, much lower than the current market rate. And, if you qualify, then you need to do a happy dance while shouting woop, woop!
An assumption is a great way to keep the loan’s interest rate and monthly payment, but it doesn’t solve the equity problem.
If you qualify for the assumption, then the next question is how to get the remaining equity to your ex-spouse. This is when couples tend to use either the balloon payment or the HELOC option.
Should keep the house, “for the sake of the kids” in a divorce?
There are parents who insist on keeping the home, “for the sake of the kids.” Here’s the truth. If you and your spouse decided to move to Montana, you would sell your home, move, purchase a new home, and presume your kids would adjust. You would make it as easy on them as possible, but you would still move forward with the sale and the move. The same is true during a divorce.
They do not need this home. They need you.
They will adjust… like all children who move.
I see too many parents, and mothers in particular, who place an unreasonably high value on staying in the house in a divorce for the sake of the kids, and it ends-up hurting them financially… a lot.
Working extra hours so the kids can keep their bedroom exactly the same isn’t giving to your kids. They need you, your sanity, and your time more than they need their “as is” room.
Finally, when researching what to do with the house in a divorce, you ultimately will want to know who gets possession of the house?
- Who gets the house in a divorce is really up for negotiation and finances.
- Who can afford the monthly mortgage of the house after the divorce?
- Who can qualify for the assumption or the refinance?
- Can the other party wait to receive the equity payment? (Most of the time, the party who wants to keep the house has an unrealistic expectation that the other party will forgo the equity payment for 5-10 years. I promise you, they won’t, because they want a home, too.)
- Who can handle the maintenance of this house post divorce? Or pay for the maintenance of this house?
Assuming you both can individually qualify for the house’s mortgage and the equity pay-out, if you both want the house, AND if only one of the parties is living in the house, then it is more likely than not that the person living in the house will be awarded possession in the divorce.
So, when people say, “Don’t leave the house in your divorce or you won’t get it at court,” they mean if all things are equal and each can afford it, then the one who lives in the house is likely to get possession of the house in the divorce. They do not mean that you must stay in the house to get your equity share in the divorce.
The biggest misunderstanding I see is when a spouse says, “You can take the house,” means the other party is giving-up their share of the equity in the divorce. I promise you, they rarely mean you take the house and the equity. They mean possession.
No one wants a divorce, but if you find yourself needing a divorce AND you do not want to burn the house down as you leave, then give me a call. I can help.
