For many divorcing couples, the marital home is the couple’s biggest asset. Like other marital assets, the family home will need to be divided between the spouses—or, if one of them wants to keep it, they’ll have to work out an arrangement that’s fair to both. In certain situations, a house buyout can rescue a couple’s savings or allow the children to grow up in the family home.
What Is a House Buyout?
Divorcing spouses can agree that one spouse will “buy out” the other spouse's financial interest in the family home. This means that the buying spouse would be the sole owner of the house after the divorce, and would exchange either money or marital property for the “selling” spouse’s interest in the house.
For example, if you and your spouse have $100,000 in equity in your home, the custodial parent might want to buy out the other parent’s one-half share so that the kids can continue to live in the same house. The payment could be made in the form of a $50,000 lump sum payment or an offset of other joint debts or assets. Another option is for one spouse to take a lower amount of alimony in exchange for a greater share of equity in the home.
What Happens When You Have a Mortgage on the Family House
Things can get a little more complicated if your home has equity, but is subject to a mortgage. That’s because you’ll need to make sure that the selling spouse is removed not only from the title to the house, but also from the mortgage. If the selling spouse isn’t removed from the mortgage, they will remain responsible for it after divorce, and could face a foreclosure (and large hit to their credit score) if the buying spouse fails to make payments.
Removing a spouse from title is relatively easy—in most states, one spouse can simply give a quitclaim deed to the other. Removing a spouse from a mortgage, though, can be trickier. Ideally, the lender would agree to release (remove) the selling spouse from the mortgage, so that the buying spouse assumes all responsibility for the loan. Unfortunately, most lenders won’t do this, leaving the buying spouse with no choice but to refinance the mortgage in their name alone.
Specifically, if you have a mortgage loan with a $175,000 balance and $50,000 in equity in the house, you’ll need to refinance with a loan for $200,000 to pay off both the original mortgage and buy out your spouse’s portion ($25,000) of the equity. The refinance would work like a normal home sale where your spouse would transfer ownership to you upon payment.
Refinancing When Interest Rates Are Rising
When interest rates are low, refinancing might not result in much of a change in the buyer’s monthly payments (and if you can get a lower interest rate than you previously had, it might even lower your payments). However, when interest rates are high or rising rapidly, refinancing can turn a once-affordable monthly payment into an unaffordable burden that makes buying your spouse out of the family home impossible. In this situation, selling the house and dividing the proceeds might be the best option.
If you’re facing high interest rates if you refinance, but strongly desire to remain in the family home (perhaps to allow your child to finish out the year in the same school district, for example), be sure to shop around to find the best refinancing rates. You could also consider:
- Reducing monthly payments by purchasing points. If the current interest rate would make the monthly payments too high, you could ask the lender about paying discount points—a one-time fee to reduce the rate. The downside is that you’ll need to come up with cash for the points at closing. However, depending on your situation, you might be able to negotiate exchanging marital property for the funds to pay for points.
- Selling the home and getting a leaseback. In a leaseback, you sell your home to an investor. As a condition of the sale, you arrange to enter into a lease that allows you to continue living in the property after the closing. Just like any other sale, you and your spouse would split any proceeds at closing, and any existing mortgage would be paid off. However, you’d be able to stay for as long as your new lease allows. Try talking with a local real estate agent to see if this is an option that could work in your market. Alternatively, do some research on institutional leaseback buyers such as EasyKnock or Rentback to see if they buy homes in your area.
- Borrowing money from family (or friends). This is a good option if you’re not able to qualify for a loan from a traditional lender. It might also be possible for the friend or family member to offer you a lower interest rate than a traditional lender. Whenever you borrow money from friends or family, it’s essential to get the arrangement in writing. Consider working with a lawyer or company that handles interfamily loans, such as National Family Mortgage, to structure the arrangement.
When Is a House Buyout a Good Idea?
A buyout between spouses can give children stability during the divorce process. If the children can stay in the family home with the custodial parent—rather than having to move to an interim place like an apartment—during the divorce, it will save them from having to endure yet another major transition. Keeping the family house will also ensure that the children can stay in a familiar community and maybe even the same schools.
When Is a House Buyout Not Such a Good Idea?
If you’re divorcing in the midst of a buyer’s market, it might not be a great time for one spouse to buy the other out. Instead, it might be wise to wait until the market shifts back to being more favorable for sellers. Hopefully, by waiting, you and your ex would be able to keep more of the investment you’ve made on your house over the years.
Similarly, as discussed above, if interest rates are higher than the interest rate you’re paying on your current mortgage, it could be difficult (or not a good financial idea) to refinance. When interest rates are low, as long as the buying spouse can qualify for the new mortgage, a refinance might not make too much of a difference in the monthly mortgage payment. However, when interest rates are higher than those on the existing mortgage, the monthly payment could become dramatically higher with a refinance. You’ll need to talk with a lender and shop around for your best refinance options.
How Do I Know What My Home Is Worth?
It’s important to have an accurate picture of your home’s value before entering into a buyout agreement. If you and your spouse have similar opinion of your home’s value, you may not need a real estate appraiser. There are several online sites, including Zillow and Redfin that will give you an estimated value of your home based on local sales, which can be tracked through public sources. However, if you want to be sure that your estimate is accurate, then you’ll want to use a certified home appraiser or real estate agent.
A real estate agent can collect information on homes that have recently sold in your neighborhood, often called “comps.” Many real estate agents will provide these market evaluations free of charge. A real estate appraiser, on the other hand, will use an even more detailed analysis to come up with an approximate value including an inspection of your home’s condition. Most appraisals cost between $200 and $600, depending on your location and the size of the house. If you and your spouse disagree about the appraiser’s report, either of you can hire a different appraiser. If you’re still unable to agree, then a judge will have to decide your home’s value by comparing the two reports.
Beginning the Buyout Process
If you’re doing your divorce yourselves, the process of dividing an asset as large as the family home can be a daunting task. A home is often a couple’s largest asset—or their biggest burden. No matter whether you have a lot of equity in the home or are underwater, consider consulting with a family law attorney to make sure you’re not leaving any money on the table. A family law attorney can help you brainstorm ways to make the terms of the buyout satisfactory for both spouses, or help you find a knowledgeable real estate broker if you decide that a buyout isn’t the right solution for your divorce settlement.