One of the first common questions to a lawyer during a divorce consultation is: What will happen to the house?
There are really only two realistic options as to how to handle a jointly owned (and jointly mortgaged) house during a divorce.
Option 1: Sell it. If neither party wants the house, this is the cleanest option that brings the most finality. No one has to worry about refinancing or getting an accurate appraisal. If it is sold to a third party, after paying off the mortgage, you have an actual certain amount to be divided with the rest of the marital assets. The process of the sale can still provoke disagreements. Parties must cooperate in hiring a realtor, getting the house ready for sale, setting a sales price, and agreeing on offers.
Option 2: The party who wishes to keep the house must refinance the joint mortgage into their individual name and have the deed retitled into their individual name. The parties must value the equity in the house for purposes of equitable distribution – which generally means determining the fair market value and then subtracting the outstanding mortgage (or mortgages) against the property. For example, if the house is worth $500,000, and the parties owe a mortgage balance of $275,000, there is $225,000 in equity.
This process can provoke disagreements over the value of the property – which will affect the calculation of the equity.
The first step is the party who wishes to keep the house must be approved for refinancing. That means they must have sufficient assets and income to qualify for a mortgage in their own name – to cover the outstanding balance on the mortgage – as well as any cash they may need to draw out of the equity.
Refinancing means a new interest rate. From 2010 until 2021, mortgage rates generally fluctuated between 3 and 5% so anyone who purchased their home during that period likely has one of those relatively low rates. However, rates creeped upwards after 2021 and now are generally anywhere from 6 to almost 8%. This means that refinancing will likely come with a higher interest rate.
A less realistic option for the marital home is for one of the parties to stay in the home, the other leaves, the parties divorce, but leave the house subject to the joint mortgage and joint title. However, owning a home – and being jointly obligated for debt, with your ex-spouse brings with it a whole host of potential pitfalls. If the spouse does not timely make the mortgage payment, you would also suffer the consequences. Likewise, one of the ex-spouses could get sued or owe tax debt – both of which could result in a lien against the property – which affects the equity.
When parents have children still in elementary school or high school, they are often reluctant to disrupt their living arrangement in the event of a divorce. That is understandable. However, not making the correct financial decision with regard to the house could be just as disruptive – so all downstream consequences must be considered.