retirement

Keeping the House Post-Divorce Has Gotten More Affordable

The question of whether to keep or sell the family home after divorce is tricky. You've got to set your emotions aside and do the math. Lately, that math has been a little more favorable for those who'd like to stay. Here's why.

Typically, financial advisers have recommended against keeping the marital home. In the past, it became too big of a financial burden for one spouse to incur all the costs associated with keeping the house on only one household income. Couples in divorce had a few options: sell the home and split the profit, buy out the other spouse or keep the house.

Recently, staying in your house post-divorce has never been more affordable. This is great news for thousands of women, who see staying put as a must-have, post-divorce, as they hope that one less disruption to their changing family life will cause fewer ripples and offer a measure of stability during this tumultuous time.

New York City matrimonial attorney Alexis Cirel has seen that “in many divorces in which children are involved, courts will award exclusive use and occupancy of the marital residence during the divorce process to the primary parent, which is frequently the mother. The divorcing woman therefore begins to establish a post-divorce household for herself and the children in their pre-existing marital home even before her divorce is finalized. This can oftentimes further entrench a woman’s emotional ties to the marital residence regardless of whether it is the right asset for her to keep.”

For many years, with real estate prices soaring, few women could afford the luxury of buying out their soon-to-be ex’s equity share of the real estate. However, recent falling house prices and lower interest rates are allowing some women to stay, which, for many, was out of the question only a year ago.

How Can I Get the Lowest Price for the House?

Even if you think you know what your home is worth, a professional real estate appraisal may be a good idea. Having an appraiser correctly value your home will reduce arguments, and it’s possible this expert will report back a lower value than you expected. The ultra-soft real estate market is hitting more expensive properties the hardest, but less expensive homes are also experiencing a softening in value.

According to Laurie Gilmore, a licensed associate real estate broker with Compass and a Certified Real Estate Divorce Specialist, “This market poses a welcome opportunity for those owners who don't necessarily want to sell, either due to the uncertainty of the future market or for reasons of emotional stability for the family. The current availability of low-interest financing along with softened prices provides the ideal combination of factors to allow a spouse to retain the family home by buying out their partner's share.”

Gilmore says she never likes to see someone in the painful position of separating themselves from a home against their wishes, so she believes this is “a bright spot in a soft market.”

Can I Afford the Monthly Costs?

Once you know that you can afford to buy your ex out, you must dust off your calculator and make sure that you can easily handle the monthly costs. Add up all ongoing costs, such as real estate taxes, maintenance costs, utilities and insurance, etc. Don’t forget to also consider what will happen when child support and alimony run out, down the road.

Is Buying the House a Good Investment?

Before you start investing in real estate, it's important to have a solid financial foundation. This means you have paid off all high-interest debt, have a fully cushioned emergency fund and are building up your retirement accounts, if you work.

Even though we are seeing a dip in prices, real estate is generally a great investment opportunity, and a sound way to diversify your portfolio. For example, since 2000, New York City’s housing market had an average annual appreciation rate of 4.44%. While the stock market can return an average of 10% per year, we also see many more peaks and valleys in stocks.

If the value of your primary residence increases over time, you will benefit from special tax perks when you sell. Upon the sale of your home, the gains will be non-taxable income to you, subject to certain limits. That makes the appreciation on your home even more valuable than appreciation on the stocks and bonds in your taxable accounts.

Homeowners also, generally, have a higher net worth than renters. As mentioned in The New York Times in 2017, the average homeowner in the U.S. had a net worth of $195,400, versus only $5,400 for the average renter, 36 times more!

There is, however, a risk of owning too much real estate. The rule of thumb is to have no more than 30% of your assets tied up in real estate, and no more than 25% of your income should be allotted for housing. Of course, this could vary based on what area of the country the client lives in. For example, in New York, we do see people spend more than 25% of their monthly income on rent and greater than 30% equity in real estate.

However, the reason we’d recommend keeping real estate at 30% of your portfolio is two-fold:

  • First, you can’t buy groceries with real estate equity, so there needs to be enough in liquid assets to fund your lifestyle. From our experience in working with thousands of clients over the years, we’ve seen that clients who hold over 30% of their assets in real estate are much more likely to eventually need to sell their home to access the equity in it.
  • Second, diversification. Your asset allocation should be well diversified at not just at the portfolio level, but also at the asset type level. This means having money in retirement accounts, non-retirement investment accounts and cash accounts, in addition to real estate. Even if you don’t need to access the equity in their real estate, or plans to sell their home in the future, we don’t like to see real estate at higher than 30% of the overall equation for the same reason that we don’t want to see exposure to any single stock at greater than 5% — diversification reduces risk.

Can I Get a Mortgage?

There is a chance that a lender won’t approve one spouse on their own, especially if you are the non-earning spouse, whose income is solely made up of small alimony and child support payments.

Jackie Frank, vice president of mortgage lending at Guaranteed Rate, shares that “some companies have niche products available for borrowers who have limited income but sizable assets. For example, if you have $1 million in settlement money, the bank would qualify you based on $8,333 per month plus whatever alimony and child support you receive. In this scenario, the borrower does not have to be employed.”

If you are eligible to take out a new mortgage, or refinance the existing loan into your name only, you can take advantage of these historically low interest rates. According to NerdWallet, current interest rates in New York are 4.59%, offering the lowest interest payments we have seen in over a decade. Better yet, the interest you pay on your mortgage is tax deductible, potentially saving you thousands each year.

About the Author

Stacy Francis, CFP®, CDFA®, CES™

President & CEO, Francis Financial Inc.

Stacy is a nationally recognized financial expert and the President and CEO of Francis Financial Inc., which she founded 15 years ago. She is a Certified Financial Planner® (CFP®) and Certified Divorce Financial Analyst® (CDFA®) who provides advice to women going through transitions, such as divorce, widowhood and sudden wealth. She is also the founder of Savvy Ladies™, a nonprofit that has provided free personal finance education and resources to over 15,000 women.

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