Cincinnati Family Law & Divorce Blog: What are the considerations in deciding to keep the marital home?
It may be surprising, but it is rare that both married partners want to remain in the marital home. If this happens in a court case, a court may look at how the best interests of the children will be served in making this decision. A court may order the house to be sold, although this is always a last resort.
Often, when one party is considering keeping the marital home, it is because of the desire to maintain consistency for their children. It is understandable that parents are deeply concerned about the impact of divorce on their children and wish to keep them in their home, neighborhood, school and community if at all possible. As lawyers, our concern is that a decision to keep the family home may be a financial hardship, which itself can be harmful to a family.
In a divorce or dissolution, if real estate is going to be retained by one party, a decision must be made about the value of the property. This can be done by agreement, where both parties feel comfortable with a certain number. Often, people obtain a real estate appraisal by a certified appraiser or bring in a realtor to provide comparative sales. To determine the marital equity of a home, the fair market value is reduced by any outstanding mortgage to arrive at the marital equity. (Note, there may also be separate equity if a party used separate money toward the purchase of the house.)
Traditionally, the marital equity is divided equally which will require a payment from the person keeping the house to the other party. This payment may come from savings, or taking a new mortgage on the property or surrendering one’s right to other assets, such as retirement, as a trade-off for keeping the home value. Each of these options will impact the financial position of the keeper of the home. Most financial planners will question the wisdom of someone relinquishing retirement money to keep a house because it is a short term decision impacting one’s long term financial security. The alternative of borrowing more money may create cash flow problems, as will a depletion of savings.
There are other considerations. If a mortgage is in joint names, which is common, normally the person keeping the house is required to refinance the mortgage so the other party is no longer liable. This requires lending approval which may be difficult depending on one’s income and the amount of support that is to be received.
Another consideration is when the home equity is determined, normally the costs of sale, including a realtor’s commission are not considered. Take for example a decision to keep a $400,000 home with a $200,000 mortgage. The person keeping the home will likely be required to refinance the mortgage. This may mean a mortgage rate higher than the current loan. If the spouse is owed $100,000 for his or her equity, the refinanced loan may jump to $300,000, likely causing a higher monthly payment. Then consider after one or two years, the person who kept the home realizes it is not financial feasible and has to sell. If the sale is for less than $400,000, the home owner loses out, and even if it sells for $400,000, the owner will have to pay a real estate commission, probably around $24,000 and the owner is likely to pay for various repairs to place the home on the market and to pass an inspection. In this scenario, the decision to keep the house may have been costly.
Of course, there is the possibility a house can be sold for more than the agreed upon value, or sold by owner, or with a mortgage at a lower rate. The point of this article is to explain the factors that should be considered in making a decision about keeping a home and to assess the amount of risk one is willing to accept.
If both parties agree to sell their home, normally the proceeds are divided equally, meaning that the parties share the real estate commission and all costs of sale, and there would be no reason to appraise the property.
When facing this issue, one must weigh all factors, including the desire to maintain stability as well as the financial impact of this decision.