The marital home is almost always a hot topic of debate in divorce situations. If you have concerns over your marital home in divorce, you are not alone. Not only do you have the financial issues to deal with, there are often sentimental attachments to the home. The home is where you raised your family, created memories and have comfort. You’re possibly worried about moving your children or making them switch schools if you sell the home. You may also have close relationships with your neighbors or other strong ties to the community.
Even if you are not particularly sentimental, you may not want to think about moving in the midst of all the other changes happening in your life. Moving is at the list of top 10 stressful things you can do – why add that to the divorce stress? Not only that, the interest rate on the home is so low, you don’t want to give that up.
However, you have to look at the overall financial picture and make the best decision for the long term. Keeping a house when you cannot afford it is one of the most common financial mistakes that people make when going through a divorce. Keeping the house in lieu of other assets which will grow faster and better may also not be the best decision. This is a tough decision and hopefully we can help you find viable answers. Here are 5 steps to follow to determine if keeping your home is in your best interest or not.
Step 1: Determine the value of your home.
This is a vital step. You must know how much your home is worth in order to make an informed decision. This can be accomplished in several different ways. The most solid option is to have the home appraised by an independent, third party appraiser both spouses agree to use. That is the most accurate and will provide a solid number. It will cost anywhere from $300 – $600. It may be well worth it for the peace of mind this solid number will give you.
If that is not an option or you don’t want to spend the money, ask a realtor to run comparisons on the house (referred to as “comps”). These are done for free usually. Ask the realtor to run comps on homes in your area which have sold with similar square footage and upgrades. You probably know your neighbors and have been in their homes. Ask for houses that you know are similar to yours as far as upgrades to the kitchen, bathrooms, flooring or a pool. The comps report will have several homes and this will help you determine which most closely mirrors the value of your home. You could also simply average the home comps values to determine the value of your home.
Another option is to look online in your county to see your tax appraised number. To do this visit the county in which you reside and search for your home or your street. Your name should come up if you dig around on the site for a bit. Some counties will have a tax valued number and a market valued number listed on their valuations. If so, we typically use the market valued number.
Lastly, you can run a Zillow report on your home. This is the least accurate, but at least is another point of information for you to use. To do this visit www.zillow.com and simply input your address. The Zillow numbers, we have found, are usually low.
With one or multiple of those 4 options, you now have a more informed number to value your home with. Once you know the value of the home, you can determine how much equity is in the home. Take the value of the home and subtract any loans on it. This gives you the net equity value of your home. If there are no loans, the value and the equity are equal.
Step 2: Determine the annual cost of home ownership.
The cost to keep the home is not just the mortgage and taxes, it’s so much more. How much does it cost for all the other monthly expenses and upkeep? Is the house large and has a big electric bill? What’s the difference in the home cost in January versus July? We suggest looking at each season and putting the cost of the home on a spreadsheet then averaging it out monthly. It’s not fun to do but grab a glass of your favorite beverage and get to it. This exercise can pay you handsomely in the future.
The following is a list of costs to consider regarding monthly costs: electricity, gas, water, trash, HOA, lawn care, pool care, home warranty, cleaning/maid service, seasonal costs of mulch, fertilization, deep cleaning, pool filter cleaning or chimney cleaning.
The following is a list of other items to consider: roof needs, condition of AC and water heaters(s), age of house and general repair needed on going, condition and maintenance of major appliances, past flooding issues and any other current needs you know of which need repair.
We encourage everyone to have an inspection completed on the house if you are leaning toward keeping it so that if you have issues, you can add the cost of repair to them into divorce negotiations. What if you have unknown foundation issues or termites? What if your roof needs repair and you didn’t know? Or, what if you have rodents in your attic, bees in your brick overhand or birds in a crawl space which are all issues I have personally dealt with and they cost money to fix.
You want to include the cost of repair to those in the divorce negotiations instead of finding out about them after the settlement is complete. We often consult with Check It Out Home Inspections for this as they do good work and are thorough.
Step 3: Review the house within the overall context of your estate.
I often find couples are trying to figure out the finances themselves and they want to divide each piece of property or account separately. Doing this can skew the overall estate significantly toward one spouse and leave out vital details. You also lose the ability to build creative win-win settlements by doing this. We place the entire estate on a spreadsheet to value and view the overall picture. You also need to know the cost basis of each asset and resulting tax ramification of each asset. This will allow you to see how much of your estate you are truly retaining in the divorce.
The house is part of the estate as are the values of your bank accounts, brokerage accounts, retirement accounts, stock accounts, employee benefits, car values and debts. Not only are the values needed, but the net tax value is needed. Everything goes on a spreadsheet and is assigned a value. After you do this, you have a view of the estate. This enables you to make better decisions regarding what to keep and what to give up.
If you find the house is one of the largest assets in your estate and you are negotiating to keep it, you are likely going to be giving up other assets. What are you willing to give up in exchange for the house?
What is the long-term ramification of the decisions you are making? Is your net worth going to grow more with the house in your estate or the stock account? Are you going to be better off month to month with this home or with a smaller home in the same area and that bank account to use? If you find the house has a lot of debt and not much value, then why fight over it?
Step 4: Consider creative settlement options.
If you decide to keep the house, you could choose to offset the house with other assets. For example, let’s say you are dividing the estate 50/50. Your house is valued at $350,000. There is also an investment account that is valued at $350,000. You might give up the investment account so that you can keep the house.
If you do not have other assets to offset the value of the home or you do not want to offset the value of the home with other assets, you might choose to get a loan to pay your ex out on his/her portion of the equity. If you are considering a loan, take extra care not to negatively impact your credit score during your divorce.
If there’s still a mortgage on the house, sometimes it can be a little more difficult to keep the house in a divorce. Ideally, you will refinance it in your name so that your ex is no longer responsible for the debt. Typically, you’ll have to walk through the refinance process and have the home on your own credit. If you are a non-working spouse, you can sometimes use child support or spousal support as income. There are rules and guidelines to this, so you’ll want to check with a lender now in order to plan for the near future.
Depending on how much equity is in the home, you might be able to refinance enough to pay your ex out on his/her portion of the equity. Let’s use the same example as before. Your home is worth $350,000 but you have a $150,000 mortgage on it. Thus, there is $200,000 in equity in the house. You will need $100,000 to buy out your spouse’s share, if you’ve agreed to a 50-50 split. To get the money, you refinance into a $250,000 loan in your name only, and cash out $100,000 to pay your spouse. (We are excluding the transaction costs to keep the example simple.)
If you prefer not to refinance for the higher amount, you could negotiate offsetting the equity with other assets you are dividing.
Step 5: Important steps to take after a decision is made.
No matter what option you choose, you’ll likely need some legal documents to make this official. Be sure to consult with an attorney on what deeds need to be created and signed. No matter if you are keeping the house or giving the house to your ex-spouse, you’ll need to complete some paperwork.
A Deed to change ownership will be needed and we encourage the spouse leaving the house, if there is a mortgage, to have a different deed for protection. Consult with an attorney to determine what is needed to protect your newly acquired asset and/or your credit.
No one (or court) can force a lender to assume the mortgage in just one person’s name where two currently exist. If the underwriting process is not an option to remove a spouse from the mortgage, there are other items of protection and possibly other negotiations to do in order to provide the spouse losing the asset but retaining the debt with an equitable offset.
You’ll also need to remove your ex-spouse from the insurance policy on the home and you’ll need to talk to your insurance company about this. We also recommend running price checks on the cost of the insurance at this point to see if you can get a lower rate. For a complimentary, multiple company rate quote visit Sig F&M Insurance Group.
The Big Picture…
Remember that deciding if you should keep the house is not a purely emotional decision. Make sure that it fits within your overall financial goals. If you are not sure if you can afford to keep the house, contact us. We can work with you to create a broader financial plan to determine if it makes financial sense. Contact Divorce Strategies Group for a divorce financial planning meeting today.