Divorcing Homeowners Should Consider Refinancing, Not Selling, in today’s Market
Even with the bubble talk that pervades our current real estate market, in most cases, the marital residence has been and will continue to be the largest family asset. When determining equitable distribution of assets, the home plays a very unique role for three distinct reasons.
Unlike cash and investments, the home often has emotional value, which cannot be quantified by an appraiser. Frequently the children’s connection to the neighborhood, school, and local friends or the additional stress of moving are factors that result in the spouse with primary custody retaining the family’s residence. This emotional value influences the distribution of a home like no other asset in the marital estate.
Another unique aspect of home ownership is the related tax incentives. The federal government promotes home ownership by allowing tax deductions for mortgage interest and real estate taxes. For a taxpayer in the 25 percent income tax bracket, home ownership costs of $2,000 a month are equivalent to rental payments of $1,500 per month. So, it is easy to see that the true cost of ownership is often more attractive than renting.
Last, most homeowners have mortgages a very different type of debt than credit card balances. Consider a home worth $500,000 with a $400,000 mortgage or $100,000 in equity. Assuming real estate prices rise 20percentin the next five years, the value of the home will be $600,000. If the mortgage balance stayed the same ($400,000), the home equity would now be $200,000, a 100 percent increase in value! In other words, because of our general comfort with borrowing money when buying a home, our investment returns on mortgaged real estate are amplified.
For these reasons, selling the marital home is many times considered only as a last resort. As part of divorce settlement discussions, a financial planner should evaluate the parties’ assets to help strategize how the marital residence can be maintained. Additionally, a divorce lending specialist should be utilized to evaluate mortgage rates and terms. Often, refinancing can create cash with which to solve equitable distribution challenges, such as paying down credit card debt, paying professional fees, or buying out the other spouse’s interest in the home.
Even in a declining real estate market, home ownership has emotional and economic benefits that should not be overlooked. Utilizing the expertise of financial professionals often helps families determine how important assets such as a home can be retained.
