Of all the major financial decisions you'll need to make in a Massachusetts divorce, few will involve larger amounts of money than the decision of what to do with the house. Few will also have a greater impact on the next chapter of your life.
Some couples simply choose to sell, split the proceeds evenly and go their separate ways. Others choose to defer the sale of the home until a later date, especially if kids are involved.
But for many divorcing couples, one spouse is inclined to keep the family home and own it outright on their own. The reason, again, could be that children are living at home and there is the goal of minimizing disruption by letting them reside there. Alternatively, if you don't have kids, perhaps you love your house so much you don't want to let it go. Or maybe the choice is being made out of pride and ego. Whatever the reason, it's well within your right to pursue sole ownership (after all, the house is partially yours).
So you've decided you want it, but how do you get it?
First, find out the price tag.
In a perfect world, your spouse gives you the green light to pursue purchasing the house from them. But in my experience, a spouse is less likely to agree to a buyout until it's proven that the other spouse can actually afford it. Otherwise, why would they agree to such an arrangement? You wouldn't agree to sell your home to a buyer who ultimately couldn't afford it. The same concept applies here.
Agreeing on a fair value can be a challenge, too. It goes without saying that affordability comes down to the overall purchase "cost." To figure out what that is, you need to come up with the total amount of equity (aka ownership) the two of you share in the property. In the simplest terms, you take the house's (agreed-upon) value and subtract what is owed, and that net figure is the amount of equity.
Here is an example:
Home value: $1,250,000
Outstanding mortgage balance: $500,000
Outstanding equity line balance: $100,000
Total shared equity = $650,000
Spouse A's share at 50% = $325,000
Spouse B's share at 50% = $325,000
Keep in mind other things can impact the actual amount. This example assumes a clean 50/50 equity split. It doesn't take into consideration who will be responsible for paying off certain debts, who will bear the cost of loan fees or who will be responsible for tax obligations resulting from this title transfer. While some amounts may appear small, they can add up quickly. Whether it's worth paying your attorneys to fight about it is a different story.
Now you know how much it's going to cost you (in this case, $325,000) to be able to buy the house outright.
Next, come up with the money.
But how? What is the best decision for you emotionally, in terms of comfort and stability? Do you scrape together $325,000, sell your belongings, cash in investments? Do you borrow money from a bank? Do you ask family members for help? All options are worth considering.
However, one of the most common buyout options is to give your spouse your share in some other marital asset. This can be money in a brokerage or retirement account that would otherwise be yours after the divorce. It could be other tangible assets, such as expensive jewelry, a car or interest in another property, just to name a few. The goal is to put together a package that enables you to complete the purchase and fund the buyout. While you won't need to borrow money or pay any loan interest going this route, you may end up house rich and cash poor.
Another option: Borrow the money from a bank through a refinance or by adding a home equity line of credit. In the example above, you owe the bank $500,000 and your spouse $325,000. The new loan you could apply for is $825,000, which would cover both expenses. But don't forget to consider the long-term interest obligations that accompany a 30-year loan of this size. If going this route, be sure to get a pre-approval letter to confirm the option is feasible. Today's lending environment requires a heightened level of due diligence, and that includes getting pre-approved before proceeding with a formal mortgage application.
A slightly different approach is to take out a home equity line of credit (HELOC) as a second mortgage in addition to your existing first mortgage. Some pros of HELOCs include that they are revolving accounts, similar to credit cards, and the interest-only payment feature keeps your monthly payments down. Cons of HELOCs include higher interest rates than first mortgages, limited interest deductibility and interest rates that are typically variable on a monthly basis (in other words, they can change monthly).
Lastly, family and friends can also be a good fallback plan. If you have family and friends willing and able to help, you're a lucky camper.
If all else fails, accept reality and move on.
If none of these options works logistically or financially, you may have to accept the reality that you can no longer keep the house. There's no shame in that. Divorce is a difficult proposition, but don't make it worse by agreeing to something that will burden you financially and make it more difficult to move on and live a happy life. First, determine what is possible. Then, determine what is prudent.
If you're not sure what you can or cannot do, seek advice from someone who's qualified. Once the emotional aspect is put to rest, you can look at things clearly from a dollars and "sense" point of view.
Should you be in the midst of a divorce or contemplating divorce, contact the Law Offices of Renee Lazar at 978-844-4095 to schedule a FREE one hour no obligation consultation.