Getting Divorced: What to Do With the House?

The list of important issues to be considered during the divorce process seems endless. If you are like most California couples, your greatest single asset is your home, whose value has most likely increased significantly over the past several years. There are many ways in which you can now use your home equity to enable you to make some of the stressful financial realities of divorce a little less burdensome.

To Sell or Refinance the House?

The house where you and your spouse have been living may be a special place for each of you. It most likely has emotional significance, but now also has practical and financial importance for each of you. Some objectives to consider when deciding whether to keep or sell your home are:

1. Maintaining continuity for your children, if any.
2. Maintaining a comfortable lifestyle and comfortable living accommodations for each spouse.
3. Reducing/eliminating consumer debt (credit cards, cars, etc.).
4. Using your existing equity to allow one or both of you to buy a new home or keep your current home.
5. Evaluating the "investment value" of your home.
6. Working together!

Continuity For Your Family/Spouse

Couples with children often feel that it is important to keep their children in a familiar and presumably "safe" place, in the same schools, etc., by remaining in the same house when parents are divorcing. Additionally, couples without children living at home sometimes find that one spouse prefers to remain in the couple's existing home.

Should you decide that providing housing continuity for your children or for one spouse is important, your ability to do so now becomes a question of finances. Can your family, or the remaining spouse, support the cost of this home?

One choice is to have the equity in this property deeded to the spouse now living in the home as part of the asset distribution settlement. Regardless, this is an appropriate time to reevaluate your current mortgage to learn if restructuring it can make keeping this house more affordable.

Maintaining Lifestyle For Each Spouse

Having comfortable and convenient living accommodations for each spouse is of primary concern for most couples. In ideal conditions, there is enough equity for each spouse to have an adequate down payment on separate new homes, with the new mortgages having manageable monthly payments. Either selling or refinancing your existing home can allow you to access your equity for this purpose.

Debt Reduction

Life as you have known it changes with a divorce. This is a good time, to use your home's equity to reduce/eliminate as much of your consumer debt (credit cards, automobiles, furniture, etc.) as possible. Reducing consumer debt will most likely raise your FICO (credit) scores and reduce financial stresses, allowing each spouse a fresh start. Adjusting to your new life will be much less complicated if you are not strapped with the debts of your past life. Either selling or refinancing the property can help you obtain this very important objective.

Your Home's "Investment Value"

Should neither spouse desire to continue to live in the house that you shared during your marriage, you may wish to evaluate its "investment value." If property values are appreciating, keeping the property and renting it may be a sound investment. Residential real estate in California has been an excellent investment with impressive appreciation these past several years. Refinancing your home and pulling as much available cash out as possible for down payments, debt reduction, etc., while maintaining a consistent modest positive cash flow as your "investment" continues to appreciate, may be financially beneficial.

Likewise, it may be wise to hold on to your home in a declining market, and wait for it to appreciate. Refinancing your home to utilize the equity for all of the purposes stated above can make sense as long as a modest positive cash flow can be maintained.

If you decide to sell your home, offering partial seller's financing for part of your home's equity may help you sell your home more quickly and may provide a return on your investment much higher than you could realistically expect from savings or money market accounts. Setting up the financing as an interest only loan may defer any potential capital gains tax liability until the loan's principal is paid in full. Consult your tax advisor as your structure the loan!

Considerations Before Selling

Issues to consider before selling your home include the various costs associated with the sale, such as real estate commissions and closing costs, capital gains taxes, where applicable, and potential income tax liability associated with alternative minimum taxes generated by capital gains taxes. Always consult your tax advisor prior to selling your home! You should also evaluate whether property values are increasing or decreasing.

Considerations Before Refinancing

Before refinancing your home, consider the cost of refinancing, including loan costs, points, appraisals, etc. It is important to recognize that the type of loan that made sense for your primary residence when you were planning to live there for many years may not be the loan type that best meets your objectives at this time. Contact a qualified mortgage representative and consider the pros and cons of each loan type. Also note that it is often less complicated to get home financing prior to a divorce.

Step Back, Work Together, Seek Professional Advice

Regardless of the reason that brought you and your spouse to the decision of divorce, it is usually advised for you to work together as much as possible in making decisions regarding your financial options. Using legal, real estate, accounting/tax, and mortgage professionals that you both like and trust, can most likely help you make well informed decisions that are not biased by the emotional stress of divorce, which will allow you to utilize your home equity for its best use to meet your changing lifestyle needs and objectives.