If you own a home and are divorcing, there are two primary ways to handle the situation:
- Sell the home.
This is the most common approach because there is almost never enough money to keep the home after divorce. You have to remember that after divorce, there will be two households, two residences, two sets of utilities, two sets of everything. Most marriages can barely handle the bills needed to pay for one household, so two is usually impossible.
If you sell the home, you will most likely evenly split the positive equity remaining after the sale. So, if you make $50,000 after paying the realty, title company, etc., each person would keep $25,000.
(Note: home equity doesn’t have to be split equally, but it usually is. There are many situations, however, in which home equity is used as an offset against something else — for example, retirement investments — and split unevenly.)
- Someone keeps the home and refinances it.
Sometimes, one person has the means to refinance the home and stay in it. While this is definitely the vast minority of cases (again, there usually just isn’t enough money to go around), it is a great option for those who can.
One of the great advantages of refinancing and staying in the home is children don’t feel so displaced after divorce. They have the constancy of staying in their home at least part of the time.
One of the primary difficulties with refinancing is equity. The other spouse is still entitled to his or her share of the home’s equity, even though the home wasn’t sold. So, the person keeping the home has to cash out that equity and pay the other person. Honestly, this is really difficult to do since almost no one has and extra $25,000, $50,000, or $75,000 laying around.
What happens most often is the person refinancing takes out a second mortgages equivalent to the amount necessary to pay the other person’s share of the equity. Thus, the other person gets his or her share. The real problem with this approach is the person keeping the house has to take out a thirty-year loan on that money.
From a financial perspective, taking out a second mortgage is a horrible decision, which is why we counsel our clients not to do it. If you don’t have the means to outright pay your spouse’s share of the equity, sell the home.
The two options above represent what happens in about 95% of divorces, but there are other options, like:
- Sometimes there is enough money in retirement assets to offset someone’s share in equity. In essence, you’re trading money you would get from the sale of the home for money contained in a 401(k) or pension. Depending on your situation, this might be a good deal.
- Allowing one person to refinance the home, and the other person takes a lien against the home for his or her share of the equity. When the home is sold, equity would be paid out. Honestly, this option is terrible for the person taking the lien (it could be years or decades before the home is sold), so it almost never happens.