“If your spouse is a louse, I’ll get you the house.” This was on the business card of one of the first divorce lawyers I ever met. Hardly the sentiments of the mediation or collaborative law I practice, but it speaks to one of the most emotionally fraught decisions in a divorce agreement – who will get the house?
After all, the house is a symbol of stability. It might be important to keep the kids in the same school district. Maybe you remember wonderful Christmases there. Or perhaps you’ve always dreamed of retiring in your home, and cannot imagine a different future.
But let’s take a very practical look at whether it is realistic for you to keep the house. This will require a little math, and some hard reality testing. There are basically four options, all of which have pros and cons:
- you purchase your spouse’s share of the house
- your spouse purchases your share of the house
- you sell the house now and divide the proceeds
- you continue to own the house together until a certain end date.
The first thing you need to determine is how much equity you have in the house. Equity is the amount you actually own, determined by the fair market value, less the amount on any mortgages or liens. A real estate broker can give you an estimate of the fair market value for free, or you can pay for an independent appraisal. It may be important for you and your spouse to work together to determine the estimated fair market value. Then add up the amounts remaining on your mortgages, home equity line of credit. You may need to do some research to find out if there are any liens on the house. The difference is your equity.
For example, if the fair market value is $500,000, and your mortgage is $200,000, you and your spouse have $300,000 in equity.
Then you would have to determine how much of the equity is marital property and how much is separate property. Did either of you own it before you got married? If so, what was the fair market value of the house at the time you got married? Did one of you use separate funds to contribute more than the other to the down payment? If your parents helped you with the down payment, was that a gift to one or both of you? Did either of you use separate funds to make large, structural improvements to the house?
Often, the spouse who used separate funds will get repaid that portion dollar for dollar for that contribution, and then the rest is divided as the marital portion. While many couples divide the marital portion equally, there may be good reasons to use a different split.
To continue with our example, let’s say your spouse contributed $40,000 to the down payment. So of the $300,000 you have in equity, $40,000 goes to your spouse, and $260,000 is marital, which you decide you will split evenly (at $130,000 each). If you were to buy out your spouse, you would need to pay $130,000 + $40,000, or $170,000, plus obtain mortgages for the rest. If your spouse were to buy you out, she or he would only need $130,000, plus getting mortgages for the rest.
If you are both working, it is likely that you are both on the mortgage. The next step would be to contact a mortgage broker or a bank to determine whether either of you can get a mortgage in your own name alone. Even if you can, if you have not established a solid credit score, it may come at a prohibitively high interest rate. Work with your broker to determine how much you could realistically borrow, and what the monthly charges will be.
Now it is time to look at your budgets, and perhaps to do a little research. First, figure out how much it costs to maintain the house each month. Figure in monthly costs for heat, air conditioning, utilities, landscaping, extermination, snow removal, swimming pool (if you have one), etc.
Next, think about whether the house will need repairs – when was the last time it got a new roof? A new heating system? Plumbing? Hot water heater? How old are the appliances? Are there any leaks in the pipes? You might want to look back at the costs of these larger items over the last 5 years, to give you a sense of what the upcoming costs will be. All of these considerations will help you gauge how much it will cost to maintain the house on an ongoing basis.
Finally, consider some of the non-tangible things. Can you afford to have your finances tied up in the house? Is this a good investment? Is real estate likely to increase in value in your area? Will it be a good place for you to grow old, or will it make sense to sell it when the kids go to college?
This was a look at whether it is feasible (or advisable) to buy out your spouse. Next month we will examine the pros and cons of continuing to own the house together after the divorce. In the meantime, you have homework to do!