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Divorce is a wild rollercoaster ride of emotions with major life-changing decisions that need to be made during a period of tremendous stress.
As far as your attorney, financial advisor, and accountant are concerned, once the issues surrounding your children – custody, visitation, etc. – are resolved, the rest of your divorce issues are, more or less, about the money. In most cases, your home will either be sold or one of you will keep it, your assets and debts will be divided, and someone will probably have to pay alimony and/or child support.
But to you, this is your life, your savings, your children, your future…your home. And we want to make sure that the decisions you make today about your marital home and all your other assets, will provide you with financial stability in your new post-divorce life. You need to think financially, not emotionally!
We know that it can be hard to separate the emotional from the practical financial decisions that need to be made. After all, the house has been your home. In this article and in future articles, I will use my years of experience working with divorcing individuals to help you explore all the angles to consider. My goal is to help you set yourself up for the best post-divorce life possible.
You want to keep your home
Keeping your home could be an emotionally safe decision. Doing so will help you avoid adding additional trauma to your children’s lives. By staying put, the kids won’t have to switch schools, make new friends, or move to a different neighborhood (which, in and of itself, can be extremely stressful for children, even if their parents weren’t divorcing).
And for you, you hope keeping the home will give your children some sense of stability and normalcy. The children can remain in the home they know, the home they grew up in, and the home they can come home to from college and maybe, in the future, come visit with their own families.
And let’s not forget about YOUR emotional ties to your home. While parents tend to do everything to protect their children, it is important to acknowledge your feelings in this. To you the home is not just walls, a roof, and windows – it might have been your dream home and the place you envisioned staying in forever to raise your family. You have friends close by and are probably connected to your community through activities, volunteer jobs, and employment.
For all those reasons, saying goodbye to your home can be gut-wrenching.
And while it’s important to acknowledge all those feelings and emotions, you need to think about the many financial aspects involved in keeping your home. So, let’s talk about those financial aspects and exactly what will need to happen for you to keep your home. In order to ascertain if this could be a viable option for you, I strongly suggest that you bring in a divorce mortgage expert early in the divorce process to work with you and your divorce attorney. You need to see if keeping your home is financially feasible before spending a lot of time and money on legal fees negotiating for something that may not be possible.
If you decide to keep your home, you will probably need to buy out your spouse’s share of the home’s equity. (This is true whether your home is a house, townhouse, condo, co-op, etc.) The first thing you need to know is how much equity is in the home. Equity equals the fair market value of the home, less any mortgages or liens on the property. I suggest getting an appraisal done by a qualified and licensed real estate appraiser who is very familiar with your neighborhood.
Once you know what your home appraised for, just subtract all mortgages and liens from that value and what remains is your equity, which will usually be subject to division in your divorce. (Keep in mind there are exceptions – for instance, if you have a prenup or postnup which states otherwise).
Here’s an example of computing equity: If your house appraised for $500,000 and you have a $300,000 mortgage balance, your equity is $200,000. If we assume a 50-50 division of this asset in your divorce, you will need to give your spouse $100,000 for his or her share of the home’s equity.
Where will you get that money?
Perhaps your share of other assets, such as bank, brokerage and retirement accounts, have enough money to cover that $100,000. (Just remember to take into account the tax implications of liquidating assets such as retirement accounts).
If you don’t have sufficient assets to cover that $100,000, maybe you can qualify to refinance your existing mortgage with a larger mortgage. In the above example, if you can qualify for a $400,000 mortgage, you can pay off the existing $300,000 mortgage and use the remaining $100,000 to pay your spouse for their share of the home’s equity.
The big question is, can you qualify to refinance the balance on your existing mortgage or obtain an even larger mortgage? That question should be answered as early as possible in the divorce process, so you don’t waste time and money going down a rabbit hole that leads nowhere. And that is why I suggested earlier in this article to bring in a divorce mortgage expert as soon as possible.
We know that you have many emotional attachments to your home that will be part of your decisions in what to do with your marital home. I want to help you respect those feelings while creating a plan for a solid and successful financial future.