Using Your Home Equity for a Divorce Settlement
More than 70% of older Americans consider their home the most valuable asset they own. For many younger Americans, the home represents a wealth of opportunities. During a divorce, you must decide what to do with that property.
Your home equity represents what your home is worth versus what you owe in loans, including both mortgages and home equity loans. This figure could be an important part of your divorce discussions with your partner.
Who gets the house in divorce? How do you split the value? Try our Home Equity Buyout Calculator.
How to use home equity during a divorce settlement
Just as you shared your property with your partner during the marriage, you must share it when you divorce.
In many states, including California, items purchased during the marriage are considered communal, meaning they must be split 50/50 during the divorce process unless both parties come to another equitable arrangement. For many people, home equity is the largest asset to split.
The average borrower has about $300,000 in home equity, researchers say. Your divorce options include the following:
- Sell the house and split the profits evenly.
- Buy out your partner and keep the house.
- Trade other valuable assets with your partner to keep the house.
Each option comes with pros and cons. For example, you could regret selling a home if you live in a tight market with few other options. But this isn’t a decision you can avoid. As part of your divorce, you must determine what to do with this very valuable asset.
Share or sell: Which home equity option is right for you?
To understand how your home equity could be used in your divorce, you need data. Follow these steps to decide what path is right for you.
1. Hire an appraiser
Professional appraisers walk through your home and property, detailing the specific benefits and drawbacks of your property as it is right now. The data you get from an appraiser is much more accurate than the home value you see on property tax statements. Appraisers consider how much your home might be worth if you were to try to sell it right now.
An appraisal can cost as little as $313 for a single-family home. You and your partner could share this expense, or you could take it on independently to get information for your divorce settlement plan.
2. Determine your true equity
Remember that your home equity is the difference between what your home is worth and what you owe. An appraisal gives you just half of this equation.
Start with your mortgage. The average American consumer has more than $200,000 in mortgage debt, though yours could differ. Determine your balance, and ask the company about early termination fees. If you would get slapped with a fine for paying the balance during your divorce, that amount should enter your calculations.
Homeowners use home equity loans or home equity lines of credit (HELOCs) to fund repairs, vacations, and more. A HELOC allows people to borrow as much as 85% of the home's value. These products surged in popularity in 2022.
A high mortgage balance and hefty HELOC could mean your home is worth very little in your settlement. Conversely, you could be surprised at the leverage you have in your divorce from this one very valuable asset.
3. Assess your financial stability
To keep a mortgaged home, you must find a partner willing to pay off the old product and give you a new one in your name only. Will your credit score hold up to scrutiny? Can you make a solo mortgage payment?
4. Assess your real estate market
If you can pay for your home as a solo owner, do you want to stay in it? A home you shared with your partner could be filled with painful memories you'd rather forget. Starting fresh could give you a restart, but it could involve moving to a new neighborhood or county.
Contact a real estate agent you trust, and take a look at a few properties available in the marketplace. If you can’t find anything suitable, staying put could be smart.
Refinancing and home equity loans
You've talked with your partner, and you've chosen to stay in the home you once shared. What are your options?
A cash-out refinance loan allows a lender to do the following:
- Pay off your old mortgage
- Give you a new mortgage in your name
- Write a check for the difference between the two loans
That final check represents your payout to your partner during the divorce settlement. You walk away with a new mortgage in your name and freedom from your partner.
If the check is small, you could make up the difference by giving your partner something of equal value, like the family car, boat, or vacation home.
Some people look into HELOCs or home equity loans to make up the difference in a divorce settlement. Unfortunately, this option does not remove your partner from the home's official title. You're both on the hook for mortgage payments and HELOC payments. If you want a clean break during the divorce, this isn't the best route for you.
Finding a mortgage partner could be relatively easy, especially if you have a good credit rating. Nonbanks, such as Rocket Mortgage and LoanDepot, specialize in products made for homeowners, and they issued more than two-thirds of all mortgages in 2020. A company like this could issue a preapproval for a loan in minutes, allowing you to hold informed conversations with your partner.
No option is inherently right or wrong. You and your partner can decide if keeping the home is best or if selling is better for everyone involved.
It’s a decision you’ll need to reach together, with or without the help of outside guidance. A divorce mediator can help you reach a decision more easily and inexpensively than if you hired an attorney.
What Should You Do With Your Marital Home in Divorce? Explore Your Options.
ReferencesOver 70% of Seniors Say Their Home is Their Most Valuable Asset According to AAG Survey. (October 2021). PR Newswire.
Average Home Equity in the U.S. Just Hit a Record High of $300,000. (September 2022). Money.
How Much Does an Appraisal Cost? HomeAdvisor.
Average Mortgage Debt in America in 2022. (November 2022). Credit Karma.
Home Equity Line of Credit and Home Equity Loans: Right Tool at the Right Time. (November 2022). USA Today.
Nonbank Lenders Are Dominating the Mortgage Market. (June 2021). The Wall Street Journal.