Home Equity Loan Divorce Settlement

• Do you have equity in your home?
• How is home equity determined?
• How is home equity split in divorce?
• How to use your equity in your divorce

How should you handle your home equity in your divorce settlement? This is a question many divorcing couples ask.

Whether you're just starting the divorce process or are in the middle of divorce proceedings, understanding your home equity loan options can make a significant difference in your financial future post-divorce.

Do you have equity in your home?

Equity in a home refers to the difference between what your property is currently worth and the amount you owe any mortgage lenders tied to the property. In simple terms, it's the portion of your property that you truly own versus what you're still paying off.

How is home equity determined?

Determining home equity involves two key steps. First, you need to know the current market value of your home. This is where home appraisers come into play. A real estate appraiser is a professional who specializes in assessing the value of properties. They consider various factors such as the size of the home, its condition, its location, and recent sales of similar homes in your area. They also look at home improvements or renovations you've made.

Once the appraiser has determined the market value of your home, the next step is to subtract the outstanding balance of your mortgage or any other loans secured by the property from the value of the home. The resulting figure represents your home equity.

For example, if your home is worth $300,000 and you owe $200,000 on your mortgage, you have $100,000 in home equity. 

Understanding your home equity is crucial when dealing with a home equity loan in a divorce settlement, as it can significantly influence your financial decisions and outcomes.

Use Hello Divorce's free Home Equity Buyout Calculator

How is home equity split in divorce?

Splitting home equity in a divorce can be a complex process. The method used often depends on the specific circumstances of the divorcing couple and where they live. However, the most common way to divide home equity is by selling the house and splitting the proceeds.

Let's consider two examples.

An example in the community property state of California

Let's say John and Jane, a couple living in California, a community property state, decide to divorce. They own a home valued at $800,000 and still owe $300,000 on their mortgage. That leaves them with $500,000 in equity.

 In community property states, assets acquired during the marriage are typically split 50/50. So, each would be entitled to $250,000 from the equity. If they sell the house, they'd each receive their respective share. If one wants to keep the house, they would have to buy out the other person's share.

An example in the equitable distribution state of New York

Now, consider Alex and Alice, a divorcing couple in New York, an equitable distribution state. They have a home with an appraised value of $1,000,000, and they still owe $400,000 on the mortgage. This gives them $600,000 in equity. 

In equitable distribution states, assets are divided based on what the court considers fair, which may not necessarily be equal. Therefore, if Alice contributed more toward the mortgage. or if Alex is deemed to have a higher earning potential, the court might rule that Alice will receive $400,000 of the equity and Alex $200,000. Again, if they sell the home, they would receive their respective shares, but if one decides to keep the home, they would need to buy out the other's share.

Can I use my home equity in my divorce?

Home equity can indeed be utilized during a divorce in a number of practical ways. Let's explore a few scenarios:

Buyout

If one spouse wants to keep the house, they could buy out the other spouse's share of the equity. This often involves refinancing the mortgage to generate the necessary funds. For example, if there's $100,000 in equity and you're splitting it 50/50, you would need to come up with $50,000 to buy out your ex-spouse's share.

Suggested: Divorce Home Buyout: How to Buy Someone Out and Negotiate

Sell and split

The most straightforward way to tap into the equity is to sell the home and divide the proceeds. This might be the best option if neither spouse wants to or can afford to keep the house. This gives both parties a lump sum that can be used to start fresh, such as putting a down payment on a new home.

Refinance

If you want to keep the house and can afford the mortgage on your own, you might consider refinancing. This could potentially lower your monthly payments, making the mortgage more manageable. Plus, if you have substantial equity in the home, you could cash out some of that equity during the refinance to pay off joint debts or to provide the funds needed for the buyout.

Home Equity Loan or Line of Credit (HELOC)

Another option, if you have substantial equity, is to take out a home equity loan, or a HELOC, to access the cash. This could be used to pay off the other spouse or cover other divorce-related expenses. But do remember, these are loans that will need to be paid back with interest.

Rental income

If the home can be rented out, the rental income could be used to pay the mortgage and possibly provide additional income. This could be an attractive option if the rental market is strong in your area.

At Hello Divorce, we understand that divorce is not simple. That’s why our goal is to simplify your divorce for you as much as possible. Deciding how to divide the marital home is often part of the divorce process. If you’re struggling with home-related issues with your spouse or former spouse, we suggest visiting our free Home Equity Buyout Calculator for more helpful information.

Learn more about splitting your marital assets in our article, Dividing Equity in a Divorce.