Dividing Home Equity in a Divorce
- Dividing equity in a divorce
- Options for determining the value of the house
- Preparing for divorce
- Calculating your home's equity
- Disagreeing about equity
- Differences in equity
- Factors that influence the split in equity
- Financial options for your equity
- Pros and cons: keeping vs. selling the home
- Glossary: Home equity and divorce terms
For most of us, our home is our biggest asset. It represents not just a financial achievement – but all that time and energy we’ve invested into making it our own. As if navigating the end of a marriage wasn’t hard enough, now we’ve got this extra layer of complexity – we have to figure out what to do with our house in light of all the competing factors from legal implications and budgeting concerns to future plans and the needs of our kids.
Sure, divorce is venturing into the unknown. It's tough, but knowing your options and having a plan makes a difference. In this blog we’ll help you understand the fundamentals of a smart, fair, and less stressful way to handle your home at divorce.
Understanding Home Value and Equity in a Divorce
The value (often called "fair market value" or "FMV") of your home is how much your home is worth.
Equity is the difference between the actual value of a property and the amount that is still owed on the mortgage of the house. If there are other loans, liens, or encumbrances on your house in addition to your mortgage, that will impact equity as well. You can learn more about your property value and how much equity you have by purchasing a property detail report.
In a divorce, you and your spouse have to divide your marital assets (possessions). This includes any equity either of you has in your home. You will have to calculate the amount of equity that is left in the home and figure out how it should be divided.
Dividing equity in a divorce
In many cases, the most valuable asset in a divorce is the family home. It is common for divorcing spouses to disagree on how to divide the value of a home they both lived in (and have been making payments on) for years. Difficult as it may be, calculating the equity of a home is a big part of coming to a divorce settlement and something that we help thousands of separating spouses with each year.
How to divide home equity in a divorce
Sometimes spouses sell their home and split the equity. If you and your ex agree that selling the home is the best option, you can divide the proceeds and part ways. If one spouse wants to keep the house (or only one spouse is qualified to keep the house), both of you will need to find another option to receive your appropriate share of the equity.
If one spouse wants to keep the home, they must do the following:
- Determine whether or not they can qualify for a financial option that allows them to keep the house
- Determine whether that option makes good financial sense for them
- Determine the fair market value of the property
- Determine how their spouse will be paid their share of the equity (Additional details and examples below).
- Ensure that the terms of the agreement are included in the divorce agreement.
What Should You Do With Your Marital Home in Divorce? Explore Your Options.
Preparing for divorce
To calculate how to divide equity in your divorce, you should start by collecting every important financial document you can find. Start by looking at whatever you and your spouse share ownership of (joint assets). This can cover cars, bank accounts, credit cards, medical bills, and your home.
Find documentation about your joint debts, including your mortgages and loans on your cars, retirement plans, and school payments. Be as comprehensive as you can be in collecting all this paperwork. Don’t risk leaving anything out. If you are a Hello Divorce customer, we will guide you through this process in Step 2.
For most people, the family home is the most valuable asset they have accumulated during the years of their marriage, which means the value of the home is going to have a considerable impact on the post-divorce finances.
Calculating the value of the home can come down to location, the state of the housing market, the length of time the house has been owned, and several other factors. This makes the division of home equity one of the most financially significant parts of divorce (if not the most financially significant part of the divorce), ultimately amounting to hundreds of thousands of dollars.
What are the options for determining the value of the house in a divorce?
There are a number of ways to determine the value of your house for your divorce. You could get a formal appraisal, a comparative market analysis, or a property tax assessment. You could also use Zillow, Redfin, or another online price estimator. Many people start with a property detail report to learn the estimated value of their home as well as other details such as whether or not any taxes are owed or if their spouse has taken out any loans on the property that they were unaware of.
Examples of how equity is divided in a divorce
To determine equity in your divorce (i.e. split the value of your home), you’ll need to assess individual circumstances related to your house or other property. If you keep the home, you need to find a way to pay your spouse their of equity. A common example is for one spouse to buy out the other spouse’s interest in the house, usually involving refinancing the home in one spouse’s name so the other spouse is completely removed from all home-related obligations.
If you keep the house, you may take out a loan that is large enough to pay off the existing loan. With this, you can pay your spouse the amount of equity they would be owed. For instance, your house may have an existing mortgage of $100,000 and the same amount of equity. That means the loan you would take out would have to be $150,000, of which $50,0000 would go to the selling spouse to pay off the existing mortgage.
On other occasions, one spouse may trade their ownership interest in the house for some other marital asset (e.g. retirement account) or property, or some other interest, like not having to provide spousal support (or financial maintenance) to the other spouse. Regardless, a refinance is often, but not always required, so the other spouse is not liable for any existing debt that is still on the property. In certain situations, you can even assume your existing loan without having to refinance your mortgage.
When interest rates are high or other factors make a refinance impossible or undesirable, you may want to consider additional options. So, as an example, one creative option Hello Divorce customers have used and loved, is a Sale Lease Back where you sell your home, and rent it back – but with an option to repurchase it later. There are many more options to discover through our HomeSplit calculator.
A final option is that the house could be sold before the divorce is final. For this to happen, the house must be put on the market, and the deal must close before a judge signs the final decree of divorce.
Factors that influence home equity
What factors can influence the amount of equity you have in your home?
First and foremost, the equity in your home will be determined by what your house is worth in your current housing market. Your market will be determined by your neighborhood, the size of your home, the overall condition of your home, other competition in the area, and the economic market that drives things such as mortgage interest rates.
For the most part, the housing market is out of your control. New buyers may have come in to revitalize a formerly older area and made it trendy, with new buyers clamoring for homes in the area. Your housing market may have been influenced by more commercial interests moving into the area, attracting more jobs and economic gains. New developments and schools may have attracted more interest from younger families. Interest rates may have dictated whether people were buying or holding off.
Unfortunately, your house value can depreciate as well. Your neighborhood and the surrounding homes may be older and have fallen into disrepair over the years. An economic recession like the one we experienced in 2008 may also create a situation where your home is no longer worth what it once was. We saw how COVID shut down the buying process one moment and then made it explode in the next. The market can change from year to year, month to month, and even day to day, all outside your control.
What can you control about the value of your home?
Updating kitchens and bathrooms can make a difference in the value of your home. Updating major systems, like plumbing, HVAC, electrical systems, and roofs, can also make an improvement in what your home is worth. Paint, new flooring, and outdoor improvements make your home more visually appealing, but these will probably have little impact on the overall market value of your home.
Pay down balances
Second, your home’s equity is determined by what you currently owe on it. This is the outstanding balance on any first or second mortgages or any outstanding home equity lines of credit. You can control this aspect of your home’s equity by paying down principal balances you owe if you can.
Community property vs. equitable distribution
In a divorce, both you and your spouse are legally entitled to a fair share of your marital assets, including the equity in your home. But how that’s determined depends on whether you live in a community property or equal distribution state. In a community property state, each of you will get a 50/50 share of your marital property. But in an equitable distribution state, consideration is given to what is fair to each spouse, even if that means the assets aren't divided equally. Division may consider many different variables, including things like the economic circumstances and contributions of both partners, the duration of the marriage, and even tax implications.
Calculating your home’s equity
The first step in understanding how much you are entitled to from your home or any other real estate you own together is by calculating the amount of equity you have in them. This is a relatively simple calculation.
- Determine how much your home is worth. You can do this by calling a local real estate professional to complete a market analysis or ordering an appraisal. Most online sites like Zillow and Redfin are usually pretty close in determining a ballpark of your home’s value based on other real estate sales in the area, but they will not be able to take into account any large upgrades you may have made to your home.
- Find out what you owe. This is any principal balance plus any interest you owe on your primary or any secondary mortgage you may have, a home equity line of credit, or any other type of financing that has used your home as collateral.
- Subtract what you owe from what your home is worth. This will be your home’s equity.
Once you know the bottom line equity figure, you can then go on to decide how it will be divided and/or who will keep the home in your settlement.
Note: Sometimes there are legal nuances or disagreements about your respective interests in the home. One of you may believe that you are owed a "reimbursement" or "credit" because you used money from a separate source (like an inheritance) to make a downpayment or purchased the property before marriage.
Ultimately, it's best to resolve these types of issues out of court to avoid spending thousands of dollars on lawyer fees. Schedule a meeting with your local attorney or one at this link to discuss your specific situation or the two of you can meet with a mediator (together or separately) to get to an agreement that is fair under the circumstances. Our mediators collaborate directly with our financial advisors and divorce real estate experts so that you have a team of professionals helping you get the best result possible under the circumstances.
The best part about an out-of-court solution is that you get to maintain power over what the ultimate result is. If you start involving the court and you can't get along, the judge would likely order a sale of the property which is often not in the best interest of either you or your spouse.
Disagreeing about equity
If you want to sever your relationship with your ex before you have to go through the process of selling the house, the divorce settlement may explicitly state that the spouses are required to divide the proceeds of the house sale equally or in some other manner that both spouses can agree on or as ordered by the court.
It might also be the case that you and your ex do not want to sell the house and want to remain co-owners of the property. This means that you and your spouse would remain financially connected, which could cause problems later on. However, this arrangement does offer each spouse the benefit of continued profits as the property appreciates in value.
For any desired scenario to play out, the spouses must have an accurate and concrete figure of the amount of equity in the home. This is the amount that will eventually be provided to the spouses or divided between them. The equity of the home is the home’s market value, minus existing debt and any costs to divest the home.
Suggested: Home Equity Buyout Calculator
Spouses can come to a mutual agreement on the value of the house, but it is also possible that you and your ex might have your own reasons to value the house differently. Even if you don’t see eye to eye on this, it is important not to create an imbalance in the marital estate by settling on an equity value that is too far from a reasonably realistic figure.
If this kind of disagreement exists between you and your ex, a real estate appraiser can offer an independent appraisal of the value of the house. You could also get a real estate agent to give you a market analysis to best estimate the property’s value.
As a last resort, the divorce court itself could rule on the value of the property. However, this is the most expensive option.
How to handle disputes over equity with outside help
During your divorce settlement process, having an accurate equity figure is essential to ensure that property division is fair.
While most couples can agree on that figure, there are times when spouses have differing interests in valuing a home’s equity higher or lower. While a professional appraiser (and even a few appraisers) can provide an accurate picture of a home’s value, some divorcing spouses will still not agree to a figure, how to divide it, or what to do with the marital home.
Hire help as needed for a better outcome
Like any other divorce dispute, equity and property divisions are loaded matters. As a divorcing couple, you may not be feeling particularly cooperative. If this is the case, you may have to rely on your attorney or get the help of a divorce mediator.
A mediator will be able to focus on the issues you’re still at odds with without taking one party’s side or the other. This, alone, usually fosters more cooperation than if both parties bring their own battling attorneys to the table. But it’s still important to be careful. You want to have a good understanding of what your home’s equity is. Accepting a figure that isn’t accurate is not in your best interests.
Each time an appraisal is completed, or a market analysis is done, it is at a cost to the marital estate. But by far, the most expensive way to have the disagreement settled is by having the court rule on it. If possible, that should be your last resort.
Differences in equity
When the amount of the equity is calculated, you and your ex can figure out how to divide the equity. For example, if both of you were employed during the marriage and contributed equally to the mortgage you acquired after you were married, the equity would typically be split 50/50.
That may not always be the case, however.
Sometimes, one spouse puts separate assets toward the purchase of the family home. Other times, a spouse makes an unequal contribution toward the mortgage. It is sometimes the case that one spouse already owned the home at the time of the marriage, but the other spouse contributed to the maintenance of the mortgage by making payments, or they made other investments that had an effect on the value of the property.
When cases like these occur, the other spouse may be entitled to some share of these contributions. When this happens, attorneys representing the respective spouses may try to reach a settlement that accounts for all these factors.
What factors could influence the split in equity?
When dividing equity in a divorce, it is important to remember that equitable distribution does not necessarily mean equal. A court in equitable distribution states can distribute the property more in favor of one spouse and not the other. Here are some factors that might influence that split:
- One spouse advanced their career, and the other didn’t. This could include going to school to get a degree that would help with employment, like law school or medical school. The court will order a higher division of property for the other spouse because, even though they did not advance their career, their maintenance of the home and family assisted the other spouse’s advancement.
- One spouse empties a joint bank account at some point during the divorce. This is considered financial misconduct. The court will order a higher division of the property for the other spouse to pay them for the lost money.
- One spouse has a chronic medical condition that affects their work and living, while the other spouse can work and earn money accordingly. The court will usually give a higher degree of property to the non-working spouse, taking into account their age and health as well as the fact that the divorce will significantly affect their financial status and ability to afford healthcare.
- One spouse remains in the family home to continue caring for any children present. Courts usually try to maintain the best interests of the children. To compensate the custodial parent for child-rearing expenses, the court awards this parent a higher share of the property.
- If one of the children is disabled, the court will award a more equitable amount to the custodial parent to help them care for the disabled child. This is because the custodial parent cannot be expected to work full-time while being their child’s caregiver.
- Only one spouse continues to make mortgage payments on the house while divorce proceedings are ongoing. The court awards a higher share of the property to the spouse who paid the mortgage while the other did not.
What financial options do you have for your equity when going through a divorce?
When going through a divorce, the most common financial options to divide your home equity are as follows:
- Buying out your spouse with a home equity loan
- Refinancing the mortgage
- Selling the house
Pros and cons: keeping vs. selling the marital home
There are so many factors to consider when deciding whether to keep or sell your marital home after divorce.
First, of course, are the financial considerations. Can you afford to buy out your spouse or refinance a mortgage on your own? Remember that now you must get loan approval based on only your financial status. Do you have enough financial resources to be able to do that? Do you have sufficient credit in your name? Will you be able to keep up with mortgage payments, taxes, insurance, maintenance, and general upkeep on your own? Are you planning to stay in the home long enough to reap the benefits of costs vs. appreciation? If not, it may make sense to sell.
But these are only the financial considerations. There are also family and emotional considerations. Do you have kids who attend schools in your neighborhood and want to stay close to friends? Keeping the marital home can provide important stability for them if you can do it. Conversely, are you ready for a new start and a new place of your own where you won’t be bumping into memories around every turn? It may be a good idea to let that chapter close.
The bottom line: keeping or selling your marital home will be a highly personal decision. Consider all your financial and emotional angles before making any hasty decisions.
FAQ about dividing equity in a divorce
Will I get half the equity, or half the value of the home, when I divorce my ex?
Not necessarily. Distribution of assets during a divorce does not necessarily mean that things are split evenly. Various factors come into play in determining what percentage of equity you get.
Can I get my equity share before the house is sold?
You and your ex would have to agree to this, or you would have to convince the court to order this.
Does equity get split evenly when the home is sold?
If both you and your spouse contributed equal amounts to the house, including the down payment and mortgage payments, the proceeds may be split 50/50. If one spouse contributed more or various other factors come into play, however, the proceeds may be divided differently.
What if my ex refuses to split the equity in the house?
If your ex fights you on equity, legal assistance can help you learn your options. You are entitled to a portion of the proceeds of the sale of the home, and if you’ve paid the mortgage, that will make a difference in what the court awards you.
How can my spouse and I divide the equity fairly?
A mediator can help you through the process of ironing out the details of your divorce, such as dividing equity. Using a mediator is much less expensive than hiring a divorce attorney and battling it out in court.
Glossary: Home equity and divorce terms
Equity is the difference between the value of your home and what you owe on it. For example, if your home is worth $400,000 and your mortgage has a balance of $250,000, you will have $150,000 in equity. When dividing the value of your marital home in your divorce, equity will be the figure you will use.
Marital assets are anything you and your spouse have acquired during the time you were married. Things you owned before are considered separate assets. During property division, you and your spouse are only required to divide your marital assets. Each of you keeps your own separate assets.
During the divorce process, both partners are legally entitled to a fair share of their marital property, meaning both their marital assets as well as their debts. Depending on where you live, marital property will be divided according to your state’s laws, or you and your spouse can come to an agreement that you consider fair together.
States have different ways of determining fair property division in a divorce. Equitable distribution states use many factors to decide what is fair in any given situation. These factors will include what each party has contributed to the marriage, the duration of the marriage, the economic needs of both parties, the ages and health of each partner, and more.
In a community property state, marital property is considered jointly owned and must be divided equally between spouses in a divorce. Only nine states recognize community property laws.
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How is Equity Divided in a Divorce? HG.org.
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When Equitable Is Not Equal: Experimental Evidence on the Division of Marital Assets in Divorce. (December 2019). Review of Economics of the Household.
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