The house is often considered the trickiest of all assets in a divorce. On Day One as you approach divorce, you may be thinking, “My house is one of my biggest assets.” or “Maybe I want to keep it.” “What you really need to understand is that there’s a lot of due diligence to be done before making a decision on what to do with the house.” The hardest part is that there are many emotional and financial events that happen during a divorce. You might also tend to think, “I know my home. It’s the only consistent element to this whole disruptive process of divorce.” That’s why you might be inclined to want to stay or keep the house.
Major reasons why it’s so difficult to know what to do with the house in divorce:
• You are Distracted: Financial dilemmas layered on top of divorce are incredibly overwhelming and stressful. You are likely trying to maintain your current lifestyle, taking kids to sports, working or looking for a job. There are many things happening at once.
• Your House is a Symbol of Stability (and maybe even status): The house itself might come to symbolize some stability and consistency, especially for kids. They don’t want to change schools. It’s a safe-haven during times of disruption.
• Hard to Know Whether You Can Afford to Keep the House: Change is constant. House conditions, the economy, and job security may change; all affecting whether or not the house upkeep, taxes, bills, and mortgage are affordable. Real estate values are fluid. Let’s say that you decide to keep the house, and the value is determined to be $100,000. Then, something happens to the economy, or an interstate goes up in the backyard, or something happens to that value down the road. Can you withstand that?
• Sentimental Value: Your home feels priceless. Dissolving the marriage is emotional. You have poured your heart and soul into creating a loving home environment for your family. You have memories that are priceless and that cloud your ability to make rational decisions. “Most people think of their homes in regards to the memories attached to it. You don’t have memories attached to your 401K.”
Often time’s one spouse will express an interest in staying in the home after the divorce. “Usually but not always it is for the main reason of keeping the children stable after the divorce for a period of time, and to get them through the transition.” When it comes to who gets the house in divorce, “A court can order in the interim who stays or who goes, but what if a couple is in the house, and you are not sure what to do with it, and the house then could become a financial burden to one or both of you. If neither spouse can afford to live there, or if it is deemed not prudent for them to be there, then it’s not sensible for the children to be in that home. And because they cannot be supported adequately in that home, then a court may order the selling of the house and division of the proceeds. “If a spouse is awarded the house in the settlement agreement and they are currently not on title then they would be a ‘successor-in-interest.’ In other words, they are able to claim the title to the property via the signed marital settlement agreement. So they can do a mortgage refinance for divorce, but it would be a cash-out refinance because they aren’t on title. So they are limited to a mortgage amount of 85% of the value. They would have had to be on title for 12 months to do a rate and term refinance.”
Reasons to keep the house in your divorce
• You can afford it easily on your own. This means that after any refinance, buy-out, you can easily afford monthly mortgage payments, taxes, insurance and upkeep on your own income. If you require alimony or child support to stay in the address, that is too risky. You can create a single-mom budget easily on Tiller, an easy-to-use budgeting app.
• The home is the biggest financial asset for most couples. You walk away from that, you may lose a lot of assets even if he buys you out. Why? Historically, real estate has been a more stable investment when compared with stocks (recent years being an exception). Between 1978 and 2004, real estate appreciated an average of 8.6 percent per year. While stocks returned more than 13 percent during that time, they also saw more peaks and valleys. True, stocks grew more. However, that is just appreciation not including the wealth-building associated with paying off a mortgage, or the tax advantages.
• Because your household income is very likely to be lower post-divorce in the short-term, the tax write offs like mortgage interest and property taxes will be even more valuable post-divorce. Plus, if you were to sell your home, you can likely pocket most or all of the profits tax-free. Only a few investment vehicles provide such a tax perk.
• It may make sense to keep the house if it is easy to maintain on your own, without too much physical, emotional or financial cost. How to run a single-mom household like a boss
• You can make an argument for keeping in the event that it will help facilitate peaceful co-parenting. For example, if staying put means you can live closer to your now-ex, or closer to schools or each of your jobs, which makes everyone’s life more convenient, ‘happy co-parenting’ can be a reason to argue for staying put. Rules for co-parenting with even the most toxic ex
• The emotional reasons to keep the house include providing a measure of stability for you and your kids during a tumultuous time. This includes staying in the same schools and close to friends and neighbors who provided emotional and practical support. However, there are lots of very good reasons to let your marital home go whether to your ex, or to sell it on the market. One of the biggest mistakes I have seen in my work, as well as have heard from divorce attorneys, is women’s insistence on keeping the marital home in divorce to her detriment.
Reasons Not to keep the house in divorce
• You can’t afford it. Accepting that your income is now lower after divorce, and therefore you lifestyle must change, is often very difficult especially for the lesser earning spouse, who unfortunately is usually the woman. Going into debt, facing losing that very home you so desperately want to hang on to, and the emotional turmoil that financial stress induces is just bad news. Don’t.
• Selling helps you move on. Houses are emotional things. That house likely represented a family and life that you wanted very much to succeed but things turned out differently. Nothing like new real estate (and furnishings!) to re-launch your new life, and put your old one behind you. The same goes for when you sell an engagement ring or some other item that you shared.
• A new home is empowering! Whether you are purchasing a new house or renting a place on your own, moms tell me that doing this solo is one of the most empowering things they’ve ever done.
• It (might) teach your kids financial responsibility financial. Because your home is likely your biggest financial asset, you should treat it with as little emotion as possible. Compromising your finances, emotional well-being and good sense for the sake of keeping a house you really like is not a good financial example for your kids.
• Selling (might) teach your children emotional resistance. Sometimes life sucks giant, hairy donkey balls. It just does. Divorce is usually like that. But showing a measure of grace, moving on, and making wise decisions for your whole family in the face of rotten times is one of the greatest gifts you can give your kids.
A cash-out refinance means that you apply for and receive a new mortgage for more than you owe. Typically, you can cash-out up to 85 percent of your home’s value.
Pros of a cash-out refinance during a divorce
• Easy way to access cash during a time when you may not have a lot of it
• Interest rates on mortgages tend to be lower than if you were to do a home equity line of credit, home equity loan, personal loan, or credit card advance.
• Interest rates on your first mortgage are usually tax-deductible
• You can keep your home and don’t have to move, which can be important at a time when everything in your and your kids’ lives is in flux.
• The mortgage is now in your name only, removing your ex from the debt and deed — which can feel really powerful for you, and be an important step in separating from your marriage and starting your life anew.
Cons of a cash-out refinance during divorce:
• Compared with a home-equity line of credit or home equity loan, closing costs can be higher
• Signing a new mortgage may extend the period for which you pay for the home — even if monthly payments are the same or lower (this happened to me).
• Signing a new mortgage may increase the overall sum you will pay for the property if interest rates have increased since you first financed it.
• If the refinance means you end up with less than 20 percent equity in your property, you may need to add PMI, or private mortgage insurance, onto your loan.
Qualify for a cash-out refinance in your divorce
The qualifications for a cash-out refinance mortgage are the same as a new mortgage, in most cases. Because you are now divorced and seeking to own the home in your name only, the qualifications are for you as a single person (not as a couple). Since a cash-out refinance is essentially the same as taking out a new mortgage, requirements for qualifying are similar. Homeowners who own their homes and meet the following criteria may qualify:
• Good or excellent credit (FICO score of 670+)
• Significant home equity: at least 20 percent of the home’s value
• Ability to repay the loan
• A debt-to-income ratio including the new mortgage payment approved by the lender.
During divorce, finances are often very tight where there was once one household with two-income or one income plus a full-time person caring for the home and kids there are now two households, two sets of insurance premiums, and increased need for child care not to mention legal fees. Obtaining a new mortgage is a big commitment. Even though you may be emotionally tied to your current home, staying put is not always the best answer. Even if your mortgage payment stays the same after the refinance, you may not be able to afford it without stress and scramble every month. Also, while the thought of leaving your home may feel traumatic today, you may feel differently in months and years to come. In fact, you may want to break free from old memories and expectations that are attached to the home.
The decision whether to keep or sell the house should be made as a part of the overall global settlement. Consider the assets and debt you expect to obtain in the divorce settlement, your anticipated income and any anticipated support you may receive (alimony or child support). Also consider the tax effects, such as the mortgage interest deduction, which may decrease your tax burden and therefore increase the amount of your income available to you. If you cannot comfortably afford the housing expenses, it might be best to consider selling the house and replacing it with something more affordable. Take your time with this decision and utilize all of the resources available to you: your lawyer, accountant, financial planner, and a trusted friend or family member who is knowledgeable in these matters.
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If you have a question about divorce law or if you need to start or defend against a divorce case in Utah call Ascent Law LLC (801) 676-5506. We want to help you.
8833 S. Redwood Road, Suite C
West Jordan, Utah
84088 United States
Telephone: (801) 676-5506