What are your options with the house/mortgage in today’s unfavorable housing market?
The marital house is always one of the main concerns of my clients. The home is where the heart is, and in a separation, it can bring up big emotions. Couples have three options (1) to sell the home and split the proceeds, (2) one partner buys the other partner out of their equity, or (3) one person keeps the house without a buy-out or in exchange for other assets/debts.
SELLING THE HOUSE
Selling the house and splitting the proceeds is often the “easiest” and most direct way to divide the marital asset. Often people will use the net proceeds to pay off joint debt and then use the money to set up a new home where new memories can be created. When deciding the sell the house, we have to discuss what to do with the proceeds, the division of equity, how/when to sell, and payment for any updates that need to be made to the house recommended for the sale.
BUY-OUT OPTION
Others choose to buy the other person out of the house. This enables one parent to remain in the same school district if they have children, or maintain that low interest rate, or any other reason one parent may prefer to remain in the house. The first thing we need to discuss with the option is house value and division of equity to determine the buy-out amount. Only then, can we determine if the buyout option is affordable or not. Many people want to stay in the house, but cannot afford it—which only ends up negatively affecting the family. Therefore, we run different scenarios to determine what the best option for your family is.
Determining affordability in today’s world is essential. The person who is buying out the other person out, will have to determine how they will get the money to pay the other person. Sometimes this involves selling off or trading off other assets. This can have tax implications, so it’s important to discuss this option with an accountant and a financial advisor first. Another method is taking out a new mortgage (if you are not on the current one) or refinancing your previous mortgage. In order to do this, that person will have to show the bank sufficient income. Buy-out payments can either be paid in a lump sum, in installments, or a combination of the two.
Another option, is when a person can “assume” the mortgage. This means that someone’s name is removed from the mortgage, and other person remains on the mortgage without having to refinance and may keep the same interest rate. Only some banks provide this and the remaining person would have to qualify with the bank to take over the mortgage. Also in these cases, the buy-out payment would have to come from another source. It is important to check with your lending agency to see if this is available.
DELAYING THE SALE OR BUY-OUT
Some families opt to delay the sale or the buy-out of the house to a more optimal time in either the market, job prospects, or the kids schooling. In these cases, either both parents stay in the same house or one person stays in the house and the other moves out. In those circumstances we always discuss co-habitation rules, access, decide on the division of responsibilities towards the house expenses and its maintenance, if both people will remain on the mortgage together, and how this may affect the division of equity when its sold.
If you two decide to stay on the mortgage together, it is important that the agreement clearly outlines who is responsible for the mortgage and escrow payments so that the other person may qualify for another house mortgage/loan. There are also must be a timeline on how long you two stay on the mortgage together recognizing that there will be an end date to the comingling of assets.
USING OTHER ASSETS TO TRADE FOR THE HOME
Some people want to trade assets for one another – like retirement accounts for the house. This is an option many couples choose. However, retirement accounts are considered pre-tax values while the house is considered post-tax value. Both as subject to different tax laws and therefore while their value on paper may seem the same, they are not. Speaking to a financial advisor or an accountant can help clarify the values if this is something you two would like to do. Alternatively, people make informed decisions to say “good enough” and just exchange the assets.
OVERALL
New York is an equitable distribution state, not a community property state—therefore it is most important that you two are making informed decisions, but also comfortable and feel that your division is equitable. Equitable does not have to be equal. If the house is more important for non-financial reasons, you can make that decision for yourself when negotiating the terms of your separation. You have two have to live with the decisions, so should be only two people making these decisions for you and your family.
