One of the biggest questions in a divorce is what to do with the house? The home can represent stability in a turbulent time, holds memories for the family, and is often one of the largest assets in the marriage. Generally, there are three options: sell it, have one spouse buy the other’s interest, or continue to co-own it. Let’s explore each.
Selling the Home
Selling the home is often the best financial decision, while also being the most difficult emotionally. Selling is the cleanest way to divide assets and allows both parties to have more liquid assets to help rebuild their lives. A financial advisor can help you understand and weigh matters like cost basis in the current home and future loan qualifications on a new home.
What if the home is “underwater” (worth less than what you owe on it) or has very little equity? A short sale to the bank can alleviate the debt but wreak havoc on credit scores. If you can wait, paying off the balance between what the home is worth and what is owed is a viable option. Under Internal Revenue code, one can use normally restricted assets (like taking money from your 401k) without penalty for this purpose during a divorce.
Buying Out Your Spouse
This can be a preferred option for families with children living at home. Although the least disruptive, maintaining this large asset may pose a significant financial challenge to a divorced family who is now faced with supporting two households.
Couples tend to choose the parent who has primary custody of the children to keep the home, at least for a period of time, to allow some stability. One challenge with keeping the home is it may represent an unequal portion of the marital assets or leave one party with little to nothing else. House-rich/cash-poor is not a good place to be, mostly because a home is illiquid – in other words, you can’t eat a bedroom.
Who assumes the mortgage? The spouse keeping the home may be able to refinance and assume full title to the home, but this is often not a viable financial decision. Even if the home is paid for or has a mortgage payment comparable to local rents, many underestimate other costs of home ownership. Property taxes, repairs and maintenance, and insurance all add up. Can the new single owner really afford to keep the home?
Continuing Co-Ownership
Some couples choose this option for a short period of time to help their family transition to their new lives. This might entail letting a child finish out a segment of education or waiting until one parent remarries.
You’d be right in thinking this option may only work for the most amicable divorces. Each party will likely need to agree upon paying for all costs associated with the home, potentially dividing the mortgage and repair/improvement costs.
Refinancing is often not a viable option, so sometimes it is possible for the home title to be transferred to one party while the mortgage is kept as a shared debt. Be careful though, as this can add to a feeling of unfinished business between both parties
Navigating Divorce
The marital home is a large financial and emotional asset. It’s important for a divorcing couple to have clear information about the home’s appraised value and costs before beginning to negotiate the next steps in keeping it. An Abacus financial planner can help you navigate these challenging pieces during the complex process of divorce, so please reach out today.
