How to Handle Your House in a Divorce

by Beverly Bird

Even more than pensions and other retirement accounts, a couple’s home is usually the most significant and expensive item they acquire together. You might own your home free and clear, but more likely, it has a mortgage against it, and this further complicates the situation. Now the home is not just an asset -- it qualifies as a debt as well. Divorce requires addressing both assets and debts.

Selling the Home

Selling your home is often the easiest solution when you divorce. It usually offers a very neat division, with each spouse walking away with a share of the equity. You each can then use this money to begin a new life. However, this may not be a quick fix, depending on the housing market. If it takes a while to find a buyer, you’ll have to address who gets to live in the house until it sells, and who is going to be responsible for the mortgage and the maintenance costs until that time.

Buyouts

A buyout is sometimes an option, but one spouse must usually have sufficient income to afford increased mortgage payments. Generally, the spouse keeping the home would refinance the existing mortgage, plus an additional amount to cover his ex's share of the equity. For example, if your home appraises for $350,000 and if the existing mortgage against it is $300,000, you would have to refinance for $325,000: $300,000 to convert the existing mortgage into your name, plus your spouse's $25,000 equity share. Depending on the interest rate, your monthly mortgage payment would probably increase. Additionally, lenders are not always willing to do cash-out refinances in some circumstances. If your home is worth $350,000, a $325,000 mortgage represents about 93 percent of its value. Not all lenders will finance mortgages for more than 80 percent of the home’s value, and those that do require private mortgage insurance in case you default on the monthly payments.

Exchange of Assets

If you run into a problem refinancing for more than the amount of your existing mortgage, you can also trade off other assets to achieve an equal division of your home's equity. For example, you may not be able to reasonably afford the increased mortgage payments associated with a $325,000 mortgage, or you may not qualify for a $325,000 mortgage, but you can manage a refinance of the original $300,000 loan. In this case, instead of buying out your spouse’s equity interest, you could relinquish a different asset worth $25,000 instead, such as a larger portion of your retirement benefits or a cash or investment account of equal value.

“Nesting”

Another option is to keep the home, but this usually only works if you and your spouse maintain a very amicable relationship. If the real estate market is bad and you want to ride it out before you list your home for sale, you might consider "nesting." You and your spouse can essentially be roommates, provided you can peacefully co-exist. This works best on a temporary basis and when your home is large enough that each of you can stake out your own space. Couples sometimes use a variation of this arrangement when they have children. The children live in the home full time, and you and your ex each reside there with them for a week or a month at a time so they don't have to move. For example, Mom might live in the home in January, then she would move out and Dad would move in with the children for the month of February. This is usually a very expensive option, however, because each parent would have to be able to afford half the expenses of the marital home, plus maintain the rent or a mortgage on another home of their own.