Divorce is often a complicated and difficult process. You’re faced with disentangling your life from your spouse and determining a new way forward. Every couple and family handles this divide in their own way.
In many cases, the marital home is one of the most significant financial assets the couple has. It’s also often an emotionally complicated asset to divide. There are a few different ways to split your home’s equity. You should always go over the specifics with your lawyer, but these are some of the main options you might consider for your home after a divorce.
Understand your equity
Before you can discuss how to divide the equity on your home, you need to know what you’re working with. The amount of equity you hold in your home may influence which decision feels best for your situation.
Equity isn’t quite as simple as looking at how much money you’ve put into your house. Equity is the market price of the home, minus your mortgage and any other debts you hold against the home’s value.
So if your home is worth $500,000, and you have a $300,000 mortgage, then your equity is $200,000. In an even split, you and your ex would each get $100,000.
Getting a professional appraiser to assess your house is one of your best options to calculate your home’s value. An appraiser will use public records, sales figures from similar homes in your area, and usually a home visit to determine your home’s value as accurately as possible.
Ideally, try to avoid getting to the point that the divorce court judge needs to rule on the value of your property. The legal fees from having the court take this task on are almost certainly going to be substantially higher than hiring an appraiser.
Real estate handling options
Sell the house
On one hand, this is the cleanest way to sever the major financial tie of owning a home together. On the other, losing a beloved home at the same time as the end of the marriage can make a divorce even more painful. Some divorcing parents may feel that keeping their children in the home they know is important for stability.
Keep the house individually
If you will keep the house on your own, the first thing you’ll probably need to do is refinance the home so the mortgage is in your name only. Your mortgage lender also needs to make sure you can afford the payments on one income.
With the $500,000 house example we discussed earlier, you’d need a new mortgage of $400,000 to cover the $300,000 you still owe on the house, plus $100,000 to buy out your ex’s share of the equity.
An equity partnership may be another way for you to access some of the funds you need to buy out your spouse. It can be more challenging to qualify for a mortgage with one income than two, or you may wish to avoid a larger mortgage if possible. Taking out part of your equity could be an option to supply some of the cash you need.
Accessing some of your equity might also be useful as a source of ready funds. Your regular bank accounts will also be divided in the divorce. You might find that you need some extra money to bolster an emergency fund, pay legal fees, or provide a cushion while you look for higher-paying work.
Keep the house as a couple
In other cases, a couple may decide it makes sense to keep both names on the property. For example, Matt and Sara are divorcing amicably, and plan to try “birdnesting.” Each of them will rent a small apartment and take turns living in the family home with the kids according to their custody arrangement. The kids stay in their familiar home, Matt and Sara both still use the space regularly, and their divorce agreement outlines a plan to sell the house and split the money after their children leave home in a few years.
Another couple, Greg and Katie, only owned their home for two years before deciding to divorce. Their home hasn’t appreciated enough in value for them to break even with a sale. They plan to rent it out to make extra money and give the home time to appreciate. They are working with their attorneys to decide if one spouse will buy the other out eventually.
If the average age of a divorcing couple is between 25 and 39 years old, and first-time homebuyers are typically in their early 30s, there’s a good chance that many divorcing couples haven’t lived in their home for the 5-7 years many real estate professionals recommend to break even on a sale.
For both couples in these examples, cashing out some of their equity may help cover moving costs, security deposits, and other expenses as they get set up in a new place.
Whatever decision you make, have your attorney help you put a plan in writing and cover what’s ordered in your divorce decree and exactly what you and your ex are both entitled to receive.
Equal or unequal division of equity?
Whether you share home equity or the money from a sale 50/50 or not depends on your divorce decree. The court process divides your total marital assets and debts the way the judge says is equitable. Sometimes that means splitting assets down the middle. Other times, that could mean one spouse gets the house and credit card debt, while the other gets the stock portfolio and car loan.
If one spouse owned the property before marriage, they may be entitled to a larger share of it after divorce. If both spouses contributed to mortgage or home improvements and renovations, that investment needs to be considered, too.
Your attorney is the best person to interpret and explain your divorce decree to answer any questions you may have about how equity will split in your situation. Don’t jump into any major financial agreements or partnerships until you understand what assets you’re keeping in the divorce.
Divorce affects all parts of your life. It’s a financially, emotionally, and logistically complex process to go through, and it often brings up a lot of grief and stress. For some people, home equity is a useful way to access some funds they need to get back on their feet in the wake of a divorce. If you think home equity funds could help you, talk to your attorney and financial advisor first to discuss the next steps that are best for your case.