6 Reasons NOT to Keep the House in a Divorce
AUGUST 17, 2017 BY KAREN COVY
A house is more than a bunch of bricks and two-by-fours. It’s even more than just a place to live. A house represents stability, security, and status. For most of us, our home is also the biggest asset we have. It’s no wonder that so many people fight to keep the house in a divorce! But, should they? Is keeping the house in a divorce really your best choice?
Why Keeping the House in a Divorce Matters So Much
Different people have different reasons for wanting to keep the house in a divorce. Parents often want to keep the house so that their kids are not uprooted at the same time their family is falling apart. ‘ Those who have little chance of being able to buy a home on their own after divorce often fight to keep the house they had while they were married. Some people want to keep the house because of its financial value. Other people want to keep the house in a divorce because they just can’t bear the thought of losing one more thing. No reason for keeping the house in a divorce is necessarily right or wrong. No one reason is better or worse than another. Some reasons are financial. Others are intensely personal. But, no matter why you might want to keep the house in a divorce, if doing so will put you in a difficult financial position later, you might want to re-think your decision now. Here are six reasons why keeping the house in your divorce may not be your best choice.
Home Sweet Home or Ball and Chain?
1. You can’t keep the house if you can’t afford the payments.
A house costs more than just your mortgage payment. If the total amount of your house payments, plus the real estate taxes, and insurance, equals more than one third of your income, you’re probably going to end up being “house poor.” You may be able to pay for the house, but you might not be able to buy groceries too! If you are relying on child support or spousal support in order to make your house payments, you better make sure that your ex will actually pay the support that’s due. You also need to remember that someday your support will end. When it does, you’re either going to have to find another way to make your payments, or you may have to sell your house then. Finally, if you have to refinance your home in order to buy out your spouse, remember you’re your mortgage payments are likely to go up. All in all, before you agree to bite off a lot of payments that you may not be able chew, you want to look very carefully at whether you can realistically afford to keep the house and still have enough money left over to be able to eat, too.
2. You may pay more if you buy out your spouse’s interest in the
house than you would if you sell the house.
If you buy out your spouse’s interest in the house, you will probably pay your spouse for his/her share of the equity in the home. Equity is the amount of value that you have in your house today. If you own a home worth $300,000, and you have a$200,000 mortgage on it, you have $100,000 of equity in it. If you sell your house, you and your spouse will split the net proceeds from the sale. That means you will pay all of the closing costs for the sale BEFORE you calculate your spouse’s share of the house.
Depending upon the law of your state, you may or may not get a credit for the closing costs if you don’t actually sell your home. In some states, like Illinois, if you keep the house in the divorce, you and your spouse will split the amount of “equity” in the house as of the date of the divorce. No one gets credit for the closing costs. That means that when you sell the house later, you pay all of the closing costs yourself.
3. Your home costs more than just the mortgage, taxes and insurance.
In order to know whether you can truly afford to keep your home, you have to factor in other costs, too. You have to think about the cost of maintenance and repairs. There is a big difference between keeping a newer or recently remodeled home, and keeping a home that is likely to need major repairs soon. If your roof, furnace, or any major appliances are old and may need to be replaced, you MUST have a chunk of money set aside to deal with those issues when they arise. If you own a condo or a townhouse, you have to include the cost of your homeowner’s association dues. Plus, you also need to consider whether any special assessments are likely to be imposed on you in the near future. You would also be wise to consider the non-monetary costs of home ownership. Houses need to be kept up. You will have to spend time cutting the grass, shoveling the snow, doing the yard work, and taking care of the house. If you’re not up for doing all of the extra work, and you can’t afford to pay someone else to deal with those tasks, home ownership can be a real burden.
4. The only way to really know what your house is worth is to sell it.
One of the biggest bones of contention in many divorces is the value of the marital home. The person who wants to keep the house in a divorce always thinks it is worth less than the person who wants to sell it. Each side gets his/her own appraisal of the home’s value. Then you fight over what the house is really worth. The problem is that the only way to really value a home you are not going to sell is through an estimate. Even a certified appraisal is only an estimate. The true value of any home is what someone will pay for it in a real sale. Period. If you sell your house, you know it’s value: the sales price. If you keep your house, you and your spouse ultimately have to agree on its value. Or, a judge has to decide its value for you. Either way, someone can get the short end of the stick. If you or your spouse wants to keep the house, you both have to be willing to accept that fact.
5. You don’t have a crystal ball.
Before 2008, everyone assumed that real estate prices would always go up. We all know now that’s not necessarily true. While today’s real estate market seems to have stabilized, there’s no guarantee that your house will be worth more when you sell it than it is today. If you haven’t bought in the right place at the right time, you can still lose your shirt in real estate. If you sell your house now, you and your spouse will share the risk from the sale. Either you both lose, or you both win. If one of you keeps the house, that person will bear the whole market risk from the date of the divorce forward. If the house dramatically increases in value, the person who kept it wins. But, if the value of the house drops, the person who kept it will eat the whole loss him/herself.
6. If you’re going to keep the house, you’ve got to be able to refinance the mortgage.
If you and your spouse took out a mortgage on your home together, the only way to get your spouse’s name off the mortgage is to refinance or sell the property. Most mortgage companies won’t just take your spouse’s name off the mortgage because you are getting a divorce. They also usually won’t let one of you “assume” the mortgage as it is. You must refinance. Depending upon your financial situation, refinancing your mortgage may not be feasible or desirable. When you refinance your mortgage, you have to do so at the current interest rate. That means you will lose the benefit of whatever interest rate you have right now.
You also have to find out whether you CAN refinance. If the spouse who wants to keep the house doesn’t have a high enough income to get a mortgage, you might not be able to refinance your home. Then, the only way to keep it will be for both of you to remain liable on your existing mortgage. Doing that can cause a lot of problems. If your spouse stays on the mortgage for the house that you’re keeping, your spouse probably won’t be able buy his/her own house in the future. What’s more, if you miss a mortgage payment, or your payment is late, that will affect your spouse’s credit rating, as well as yours. For all these reasons and more, if you can’t refinance your home, your spouse may insist that you sell it.
Figuring Out If You Should Keep the House in a Divorce
Deciding whether to keep the house in your divorce is intensely personal and highly complex. It’s a decision that has as much (or more) to do with emotion as it does with money. But, if you let your emotions make your decision, you may very well end up making a bad one. Keeping the house “for the kids,” is great. But, if you keep the house today, only to lose it to foreclosure in a year or two, your kids will NOT be better off. What’s more, keeping a house you can’t afford will only continue, or increase, the financial misery you suffered in your divorce. Before you can decide whether to keep the house in your divorce, you must honestly evaluate your financial situation. You have to talk to a mortgage broker and find out whether refinancing the house is possible. You should talk to a financial planner to find out whether your new payments will be affordable. Armed with solid financial facts, you will be able to decide whether keeping the house in your divorce is truly your best choice.