What happens to your home in a divorce?

by Dan Krell © 2005

Did your hear about Regina and Jonathan? Who knew they were headed towards divorce? What’s going to happen to that beautiful colonial they bought in Silver Spring? Didn’t they settle 9 months ago? Unfortunately, you hear this thread of conversation more often these days. When divorce is imminent, people tend to worry about the children’s future, how to treat the mother-in-law who was so nice (lucky fellow), how their friends will react. Of course, these should be at the top of one’s mind. There are many concerns to worry about.

Beyond family concerns, finances and real estate are important also. Figuring out who gets what and how much can get messy, antagonistic and litigious. There is no getting around it. That is why an attorney should be consulted on these matters. You can get more information on family law and contacting a local attorney by going to the following website: www.montbar.org/barfound/mclan/famlaw.htm.

What happens to the marital home when people get divorced? Let’s look at Regina and Jonathan. In a simplistic explanation, they have several amicable options. The options available depend on whether they want to stay in the home or not. Either way, both will have to agree on decision.

I understand that Regina wanted to stay in the home because she wanted to keep the kids at the same school. Among the many options available for her to stay in the home, one common solution is for Regina to buy out Jonathan’s equity in the home. You can see this is a friendly solution because, for a price, Jonathan will give Regina the home.

In buying out Jonathan’s equity, Regina will have to come up with the money to pay him; however, Regina doesn’t have the cash. How will she get the money? She can get the money out of the home itself by taking out a home equity line of credit or refinancing the home through a cash-out mortgage.

The first step is for Regina and Jonathan to figure out how much equity is in the home. They can do this by having someone appraise the home. The appraiser will determine the fair market value. The equity is determined by subtracting all mortgages from the appraised value. After the home has been appraised, Regina and Jonathan have to agree on how to split the equity. In their case, they determined that there is $100,000 equity in the home and they decided to split the equity equally.

Regina decided to call the ABC Mortgage Company to obtain a cash-out mortgage. The appraised value of the home is $564,000. She decided to get a mortgage of $450,000. A majority of the mortgage will pay off all existing mortgages and closing costs. The remainder, $50,000, is the amount needed to buy out Jonathan’s equity of the home.

One of the common pitfalls here is that the marital home is often times purchased using both spouses’ incomes to qualify and pay the mortgage. Thankfully, Regina is a senior executive with a local company and earns more than enough to qualify and pay the mortgage on her own.

Unfortunately, many ex-spouses are not as amicable as Regina and Jonathan. Either they can not agree on what to do with the home, or one spouse wants to stay in the home but cannot afford to stay there on their own. Another frequent solution is to sell the home and distribute the proceeds as decided by the spouses and their attorneys.

Selling a home is always an emotional and stressful time. Selling a home under these circumstances is more so because the selling parties are antagonistic if not hostile towards each other. No matter how friendly the parties are in a divorce, it is still a very emotional time and it’s important to be as objective and fair as possible when making decisions about the marital home.

This column is not intended to provide nor should it be relied upon for legal and financial advice.
This column was originally published in the Montgomery County Sentinel 4/30/2005.
Copyright Dan Krell 2005.