When I got divorced I kept the house. I had a lot going for me: my ex moved out, unannounced (which left me legally entitled to it), I had a job and good credit. Plus we had a lot of equity in the home and mortgage rates have been at an all-time-low, so it wasn't a huge financial stretch for me to refinance and buy him out. I wanted to stay, I wanted to keep the house in my name, and so when we divorced I refinanced it in a cash-out refinance, gave him a chunk of cash and called it a day.
This was the right decision for me.
But this isn't true for all women. Deana Arnett, a certified financial planner with Rosenthal Wealth Management Group in Northern Virginia. This savvy money professional went through her own divorce a few years ago and walked away from the house she shared with her ex. “It was the worst move I ever made,” Arnett says. “It was a very emotional time and all I could think of was ending in a clean way without lawyers and fighting. In hindsight I realize I walked away from a lot of money that was rightfully mine.” Today she advises women to do better for themselves and their kids.
There are pros and cons to keeping the house in the divorce. Which is right for you?
Reasons to keep the house in your divorce:
- You can afford it easily on your own. This means that after any refinance, buy-out, you can easily afford monthly mortgage payments, taxes, insurance and upkeep on your own income. If you require alimony or child support to stay in the address, that is too risky.
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- The home is the biggest financial asset for most couples. You walk away from that, you may lose a lot of assets — even if he buys you out. Why?
- Historically, real estate has been a more stable investment when compared with stocks (recent years being an exception). Between 1978 and 2004, real estate appreciated an average of 8.6 percent per year. While stocks returned more than 13 percent during that time, they also saw more peaks and valleys. True, stocks grew more. HOWEVER, that is just appreciation — not including the wealth-building associated with paying off a mortgage, or the tax advantages.
- Because your household income is very likely to be lower post-divorce in the short-term, the tax write offs like mortgage interest and property taxes will be even more valuable post-divorce. Plus, if you were to sell your home, you can likely pocket most or all of the profits tax-free. Only a few investment vehicles provide such a tax perk.
- The emotional reasons to keep the house include providing a measure of stability for you and your kids during a tumultuous time. This includes staying in the same schools and close to friends and neighbors who provided emotional and practical support.
However, there are lots of very good reasons to let your marital home go — whether to your ex, or to sell it on the market.One of the biggest mistakes I have seen in my work, as well as have heard from divorce attorneys, is women's insistence on keeping the marital home in divorce — to her detriment.
Reasons NOT to keep the house in divorce:
- You can't afford it. Accepting that your income is now lower after divorce, and therefore you lifestyle must change, is often very difficult — especially for the lesser-earning spouse, who unfortunately is usually the woman. Going into debt, facing losing that very home you so desperately want to hang on to, and the emotional turmoil that financial stress induces is just bad news. Don't.
- Selling helps you move on. Houses are emotional things. That house likely represented a family and life that you wanted very much to succeed — but things turned out differently. Nothing like new real estate (and furnishings!) to relaunch your new life, and put your old one behind you. The same goes for when you sell an engagement ring or some other item that you shared.
- A new home is empowering! Whether you are purchasing a new house or renting a place on your own, moms tell me that doing this solo is one of the most empowering things they've ever done.
- It (might) teach your kids financial responsibility financial. Because your home is likely your biggest financial asset, you should treat it with as little emotion as possible. Compromising your finances, emotional well-being and good sense for the sake of keeping a house you really like is not a good financial example for your kids.
- Selling (might) teach them emotional resistance. Sometimes life sucks giant, hairy donkey balls. It just does. Divorce is usually like that. But showing a measure of grace, moving on, and making wise decisions for your whole family in the face of rotten times is one of the greatest gifts you can give your kids.
How to keep the house in a divorce using a cash-out refinance
When I got divorced 10 years ago, one of the biggest sources of stress — and confusion — was where I would live, and what my ex and I would do with our home. When he moved out, I stayed in the New York City apartment we’d bought together a few years before. There was a lot of equity in it, I felt like it was a good investment, I loved the home, neighborhood and building, and I didn’t want to move.
I contacted a few mortgage brokers to explore what my options were. Based on my income, the home value, terms of my divorce (which, in my case was that we split any equity in the home), a cash-out refinance was my best option. Since then, I have been able to finalize my divorce in a fair way, now own my home 100 percent in my name, and have a payment I can easily afford — plus a nice tax deduction every year.
What is a cash-out refinance?
A cash-out refinance means that you apply for and receive a new mortgage for more than you owe. Typically, you can cash-out up to 85 percent of your home’s value. This was a great option for me, because I owed my ex a lot of money — which I did not have at the time — there was enough equity in the home, interest rates were lower than when we bought the home, and my income was enough so that I could comfortably afford the new payments.
Here is an example:
Let’s say there is $200,000 left on your mortgage, and your home is now worth $350,000. With a cash-out refinance, you might refinance up to 85 percent of your home’s value ($297,500) and take part of the $97,500 difference back in cash to spend however you like — including paying your ex his share of the divorce settlement.
Pros of a cash-out refinance during a divorce:
- Easy way to access cash during a time when you may not have a lot of it
- Interest rates on mortgages tend to be lower than if you were to do a home equity line of credit, home equity loan, personal loan, or credit card advance.
- Interest rates on your first mortgage are usually tax-deductible
- You can keep your home and don’t have to move, which can be important at a time when everything in your and your kids’ lives is in flux.
- The mortgage is now in your name only, removing your ex from the debt and deed — which can feel really powerful for you, and be an important step in separating from your marriage and starting your life anew.
Cons of a cash-out refinance during divorce:
- Compared with a home-equity line of credit or home equity loan, closing costs can be higher
- Signing a new mortgage may extend the period for which you pay for the home — even if monthly payments are the same or lower (this happened to me).
- Signing a new mortgage may increase the overall sum you will pay for the property if interest rates have increased since you first financed it.
- If the refinance means you end up with less than 20 percent equity in your property, you may need to add PMI, or private mortgage insurance, onto your loan.
How to qualify for a cash-out refinance in your divorce
The qualifications for a cash-out refinance mortgage are the same as a new mortgage, in most cases. Because you are now divorced and seeking to own the home in your name only, the qualifications are for you as a single person (not as a couple):
Who can qualify for a cash-out refinance?
Since a cash-out refinance is essentially the same as taking out a new mortgage, requirements for qualifying are similar. Homeowners who own their homes and meet the following criteria may qualify:
- Good or excellent credit (FICO score of 670+)
- Significant home equity — at least 20 percent of the home’s value
- Ability to repay the loan
- A debt-to-income ratio — including the new mortgage payment — approved by the lender. Check mortgage rates and offers at LendingTree.
Other notes about cash-out refinance in divorce:
During divorce, finances are often very tight — where there was once one household with two income or one income plus a full-time person caring for the home and kids — there are now two households, two sets of insurance premiums, and increased need for child care — not to mention legal fees.
Obtaining a new mortgage is a big commitment. Even though you may be emotionally tied to your current home, staying put is not always the best answer. Even if your mortgage payment stays the same after the refinance, you may not be able to afford it without stress and scramble every month. Also, while the thought of leaving your home may feel traumatic today, you may feel differently in months and years to come. In fact, you may want to break free from old memories and expectations that are attached to the home.
Learn if you qualify for a home equity loan here.
Emma Johnson is a veteran money journalist, noted blogger, bestselling author and an host of the award-winning podcast, Like a Mother with Emma Johnson. A former Associated Press Financial Wire reporter and MSN Money columnist, Emma has written for the New York Times, Wall Street Journal, Forbes, Glamour, Oprah.com, U.S. News, Parenting, USA Today and others. Her #1 bestseller, The Kickass Single Mom (Penguin), was named to the New York Post's ‘Must Read” list.
Emma regularly comments on issues of modern families, gender equality, divorce, sex and motherhood for outlets like CNN, Headline News, New York Times, Wall Street Journal, Fox & Friends, CNBC, NPR, TIME, MONEY, O, The Oprah Magazine and The Doctors. She was named Parents magazine’s “Best of the Web,” “Top 15 Personal Finance Podcasts” by U.S. News, and a “Most Eligible New Yorker” by New York Observer.
A popular speaker, Emma presented at the United Nations Summit for Gender Equality. Read more about Emma here.