Take Control Blog

Should I Keep the House?

Iris loved her house.  Purchased over 15 years ago, it was her “baby”.  Everything about the house had her touch.  She could never imagine living anywhere else.

Iris decided to divorce.  Her spouse wanted to sell the house, but Iris wanted to keep it.  It was something Iris just had to have in the negotiation, and so she did.

Now, years after the divorce, Iris regrets her decision.  Unfortunately, this type of regret is not uncommon for people like Iris.  “I tell people all the time that you have twice the expenses and the same pot of income to go around,” says Jennifer Failla, principal and founder of Planning Through Divorce.  “You might not want to hear the reality, but trained professionals are your advocates and your agents of reality.  Understanding your costs, options and potential outcomes, all of them, can help the client make informed financial decisions not just during the divorce but afterwards as well.”

To keep the marital home or not is never an easy choice.

The first thing to consider is if you should even want it.  Ask yourself, “I’m I doing this for me or the kids?”  Well, time passes and things change.  Kids grow up and move away.  Think into the future.  Is this the home where you want to live 10, or 20 years from now?  Although you may want to keep the house now that the kids are young, be assured that kids are resilient.  They can weather a move to a new place.  Regardless if you keep it or not, the kids’ lives will change.  And there will be a new home anyway; that of your ex-spouse.

Then there is the affordability factor.  Even if the house is paid for, there are utilities, regular maintenance, taxes and insurance.  Depending on the size and location of the house, this could run into thousands of dollars per year.  And of course there are the unexpected repairs that always seem to come at the worst time.  Another thing to consider is the amount of work needed on the property. Do an honest budget.  Can you even afford to keep the house and still retain a reasonable standard of living?

You’ve decided you want the house.  Does it have value or is the property “upside down”.  If you owe more than it’s worth, be very careful.  If you anticipate an increase in value then it might be worth keeping.  If the house has a positive value or equity, think about what you would do with your portion of the equity, if the house were sold.  Would you be better using this money for investing or buying a smaller place to live?  Remember that if you keep the property, you will have to forfeit other assets, to your spouse, in equal value to the equity in the home.

Many people mistakenly believe that the property’s title and mortgage note are the same thing.  They are not.  No matter whose name appears on the property deed or the mortgage, the property is a joint, marital asset.  But if you decide to keep it, only your name should be on the deed and the note.  Transferring the deed is as simple as executing a Quit Claim Deed. But this is only one side of the equation.  The thorny issue is that of a new mortgage should there be an outstanding note on the property.

If both you and your spouse signed the mortgage, the bank does not care about the divorce or who now owns the deed.  The bank wants its money back.  So if you are keeping the house, you will need to re-finance the existing mortgage.  And this usually represents a major problem.  As an individual will you be able to qualify for a new mortgage?  If not, can you get a co-signer or will your spouse be willing to remain on the hook for the mortgage.  You will both be responsible for paying the bank, either via a re-finance or the sale of the house.

Future taxes are not something most of us worry about, but it’s something to consider in this case.  Let’s say you owe nothing on the house.  And at the time of the divorce, the house is appraised at $200,000.  If you keep the house, your spouse gets a $100,000 in other marital assets.  This also means that your spouse pays no tax on the “proceeds” from his or her “half” of the house.  But if in the future you decide to sell the house, you will carry the full tax burden for the $200,000, plus any appreciation in the house’s value.  You can address this situation with an agreement in the MSA that accounts for future long-term capital gains on the marital home.

There are many emotional reasons and attachments wanting to keep your home.  Also, going through the divorce, your home may be your only refuge.  The one place you feel at peace.  Just keep in mind that emotions fade over time and then you are you left with the financial reality of your decision.