A divorce is rarely a perfect situation that my clients look forward to. They may be anxious to get it over with, but the process itself can be tedious and riddled with complexity. Property division is one area where I often see couples make mistakes with life-long consequences.
Why does this happen? In my experience, the main cause of making bad property division choices is the combination of human emotions and lack of knowledge. Let’s address the ingredients one at a time.
“But I love our family home!”
I get it. People get attached to their homes. Homes represent more than just the down payment and the mortgage – families put their heart and soul into making the space their own. It is a site of happy memories and a solid investment in real estate, which makes keeping the house a comfortable choice and a good financial decision. Or so it would seem.
Before you go down fighting tooth and nail to keep the house, I urge you to take a deep breath and look at the practical side of the matter. Will you have to refinance the mortgage to get your spouse’s name off the debt? If yes, will you qualify for the new mortgage? What will the mortgage payments be? If no, can you afford the current mortgage payments? What is the expected maintenance cost, from routine upkeep like gardening and gutter cleaning to larger expenses like replacing the oven or the air conditioning unit? You can expect to spend between 1 to 4 percent of a home’s value each year on maintenance and repairs. This cost only goes up as the house ages. If your house is valued at $350,000, your annual hit ranges from $3,500 to $14,000. Does your stand-alone newly single person’s budget allow you to cover all of those expenses comfortably?
Consider also that you may not need a large house as much as you need a head start in rebuilding your savings. Divorce can result in a serious financial hit to your savings and retirement plans, and the value of the house may serve you best if it is allowed to grow through investment.
Make the right decision for your circumstances
Selling the house isn’t always the right decision. For example, you may choose to keep the house in an effort to minimize the impact of the divorce on your children. By avoiding a move, you get the benefit of keeping their friends, sports and school routines undisturbed during this difficult period of adjustment – and there is value in that. If your house is fully paid for and its size and annual maintenance costs are easily affordable, it may be wise to hold on to it in the long run. However, you must consider all aspects of the decision and project them into the future. What will happen when alimony stops? What about a situation where the paying spouse passes away before the alimony period ends?
I recommend working with an experienced financial planner who can ask you these tough questions and look at the far-reaching consequences of the decision. The momentary feel-good of having “won” in the divorce deal by keeping the family house is meaningless if you find yourself in a fire sale situation a year later. As difficult as it is, do your best to face the questions and focus on the most constructive outcome over the long term, house or no house.