One of the principal assets spouses fight over in a divorce is the marital residence. Whether out of sentiment or spite, investment or inertia, spouses get quite heated about the marital home. However, in all the back and forth, too few first walk through what it would actually cost to keep the house and how to go about doing that.
If the house has very little equity, holding on to the house may be quite easy so long as the spouse seeking the house can secure financing. For example, if the house has $20,000 in equity (for whatever reason, from purchasing recently to buying at the wrong price at the wrong time), the spouse seeking the house would have to offset the $10,000 in equity owed to the other spouse – either by direct cash payment to the spouse, a swap of another asset, or agreeing to pick up debt of the same value. If the spouse seeking the house has sufficient employment, good credit and a reasonable debt to income ratio, that spouse should be able to refinance the house in his or her own name. So, in this case, problem solved.
One caveat to this hypothetical: if the reason the equity is low is because the parties have a home equity line of credit or a second mortgage, that debt needs to be addressed. For example, if the debt was secured to make improvements in the home, those are clearly house-related and marital debts. On the other hand, if the loan against the house was to pay down student loan debt to one spouse, that loan is really not something the other spouse would classify as marital, and if that spouse is the one taking the house, that spouse would want to deduct that loan amount from the equity in the house for that spouse.
When the house has significant equity, the division becomes more tricky because the spouse not taking the house has a large stake that must be compensated. For example, if the house has a net equity of $100,000, each spouse would claim $50,000, meaning the spouse seeking the house would have to pay the other spouse $50,000. Given the cash flow of that spouse, that might not be an easy task. The higher the equity, the higher the buyout. When this happens, the spouse seeking the house has to decide whether to lose a certain amount of cash upfront to secure the buyout, to offset the balance with other shares of marital assets like a retirement fund, or to encumber the house with a new mortgage. It is important to play out all of these scenarios with a financial planner to determine the best course of action. Foregoing retirement income generally is not a great option. However, adding to the mortgage might not be so bad if the mortgage is low because of the higher equity. The spouse would have to explore the refinance options before making a final decision. Regardless, a spouse should never fight for a home without first determining if it makes financial sense, refinancing could be secured, and a plan is in place.
If you have questions about who gets the marital residence in divorce, contact us – we can help.