Nobody enters into a marriage thinking about the possibility of divorce. However, research shows that a hefty percentage of couples will eventually end up splitting ways. If you find yourself in this situation, separation of assets can be one of the more difficult issues to work through. In particular, you’re probably wondering what happens to your house.
The 5 Most Common Options
For most married couples, their primary residence is their single largest asset. It’s also the asset with the most emotional attachment. If you aren’t careful, things can get messy in a hurry. But as you work through what to do with your house, there are five common options. Let’s explore each of them so that you and your spouse can make an educated decision that’s best for everyone involved.
Sell The House and Allocate the Profits
The easiest solution is to sell the house and then allocate the profits to each spouse. This is the cleanest and simplest way to liquidate the property and ensure everyone has the cash they need to make their own financial decisions moving forward. However, this isn’t always practical.
Selling a home with the intention of liquidating can get sticky. For example, one spouse may think the property is worth $350,000, while another spouse simply wants to cut ties and is willing to sell it at $310,000. When an offer for $310,000 comes in, one spouse rejects it and the other accepts it. Bitter arguments ensue and relations become even more hostile.
Even if both parties agree on the price, it may not make sense to sell right away. If the housing market isn’t healthy, hanging on to the property for a little longer could net a higher sale price.
While selling tends to be the best option, you’ll have to work through your individual circumstances to make the right choice.
Buyout and Refinance
If one spouse prefers to stay in the house and the other is fine moving out, a buyout could be a feasible option. However, this typically requires one spouse to have sufficient income to cover the 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,” Beverly Bird writes for LegalZoom. “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.”
It’s also worth noting that lenders aren’t always keen on the idea of doing cash-out refinances. Many lenders shy away from financing mortgages for more than 80 percent of the home’s value. If you’re considering pulling out a sizeable chunk of equity, you’ll probably need to take on private mortgage insurance (PMI) at an additional cost.
Stay on the Mortgage, But Move Out
For one reason or another, refinancing isn’t always possible. But if you and your spouse are dead set on having one person move out and the other remain in the property, you’ll have to figure out another method.
While it doesn’t legally absolve you from responsibility on the mortgage, one partner could opt to move out and trust that the other spouse will continue making payments. However, remember that all payment activities and loan balances will appear on each individual’s respective credit report.
Rent the House
If neither party cares about living in the house after the divorce, yet you don’t want to sell the property, you could always try to find a renter to cover the mortgage. If you decide to go this route, it’s best to hire a property management service to oversee the day-to-day operations.
When kids are involved, circumstances are always a bit trickier. You have to consider things like continuity, custodial rights, schools, etc. Sometimes the best choice is to keep the kids in the house.
If you want your kids to stay in the house, you can try “nesting.” This basically means you and your spouse become roommates. Provided you can peacefully co-exist with one another, you each take your own space in the home and commit to co-parenting.
“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,” Bird explains. “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.”
Moving Forward: How to Keep Real Estate Separate
Let this current issue be a learning experience for you as you move forward in your life. Should you ever remarry, it would behoove you to protect your real estate holdings and assets prior to being wed. A failure to do so could result in unwanted circumstances.
The best way to protect real estate is to keep it totally separate. Don’t add your spouse to the title and pay the mortgage out of your own separate bank account. (Comingled funds can create challenges with ownership when there’s a divorce or death.)
The only real estate that you and your next spouse should own together is real estate that’s purchased during the marriage. Otherwise, you’re both encouraged to sign prenuptial agreements and keep assets separated. (A good estate planner and/or attorney can help you with concrete plans that are specific to your situation.)
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