Friday, November 11, 2005

Can you afford to keep the house after divorce?

In many cases, one spouse will want to keep the house after divorce and buy out the other party’s share. Reasons include: stability, keeping the children in the same school district, attachment to the house or neighborhood, and/or inability (perceived or otherwise) to afford comparable housing. Before making this decision, you should do your homework so that you are armed with all of the information necessary to make such a decision.

The first step is to find out the current value of the house. A realtor can usually provide an estimate of the fair market value at no charge. Fair market value is the amount that you can reasonably expect to get if you sell the home. This number can be used for planning purposes. However, this number will not be exact and may be artificially inflated. To determine a more exact figure, you can obtain a certified real estate appraisal, usually at a cost of $300-$500. This should be done in cooperation with your attorney.

Once you know the value of the house, determine the present equity which, generally speaking is the value minus the debt against the house (first and second mortgages, home equity lines, etc.) In Pennsylvania, if you decide you want to keep the house as part of the overall divorce settlement, you can generally subtract theoretical costs of sale to determine the value for the purposes of equitable distribution. For example, a realtor usually charges six percent for his or her fee and transfer tax, outside of Philadelphia, is usually one percent of the sale price. Therefore, if a house has a fair market value of $100,000, for the purposes of equitable distribution, it may be valued at $93,000. ($100,000 value minus $6,000 realtor commission and $1,000 transfer tax).

If you decide to keep the house, generally, the mortgage will have to be refinanced into your name alone. That means you will have to qualify for the refinancing. You can begin talking to various lenders to determine if you would be eligible. You may also need to borrow more of the equity in order to buy out your spouse’s share. This can only be determined by an overall evaluation of the entire equitable distribution scheme. While it is a good idea to preliminarily investigate different mortgage options, you should not apply for a mortgage until you are ready, as applying for too many mortgages can affect your credit report.

The decision whether to keep or sell the house should be made as a part of the overall global settlement. Consider the assets and debt you expect to obtain in the divorce settlement, your anticipated income and any anticipated support you may receive (alimony or child support). Also consider the tax effects, such as the mortgage interest deduction, which may decrease your tax burden and therefore increase the amount of your income available to you. If you cannot comfortably afford the housing expenses, it might be better, overall, to consider selling the house and replacing it with something more affordable. Take your time with this decision and utilize all of the resources available to you: your lawyer, accountant, financial planner and a trusted friend or family member who is knowledgeable in these matters.

1 comment:

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