Whether to keep the house is a numbers question before it is an emotional one. The useful comparison is what keeping it may cost you each year on your own income, and what you may give up elsewhere to keep it. Once you can see both sides, the decision is yours to make with your eyes open.
The house is rarely only a house. It may be where your children grew up, the one thing that stays the same while everything else changes. That matters, and I would never ask you to ignore it. I would only ask that the feeling and the figures are both on the table before you agree to anything.
What keeping the house actually involves
Keeping the house usually means more than staying in it. Depending on your situation, it may involve several separate pieces:
- A buyout of your spouse's share. If the house is part of what is being divided, keeping it often means giving your spouse something of equal value in exchange, such as other assets or a payment.
- Refinancing into your name alone. Many lenders will not simply take one name off a loan. A refinance replaces the existing mortgage with a new one in your name, at whatever rate and terms are available then.
- Qualifying on one income. A lender looks at the income you will have after the divorce, which may include support, and it may not count every source the same way. Ask the lender before you rely on any figure.
- Carrying costs. Mortgage payment, property tax, homeowner's insurance, utilities, and any association fees, now paid from one household's income rather than two.
- Maintenance and repairs. Roofs, furnaces and appliances do not wait for a convenient year. A house that was easy to afford with two incomes may feel different when a large repair arrives on one.
One point surprises many people. Changing who is named on the deed does not by itself change who is responsible for the loan. Those are separate. Ask the lender what it requires to release a spouse from the mortgage, and ask your attorney how the agreement should address it.
The trade: the house against everything else
For many couples, the house and the retirement accounts are the two largest assets. That is why keeping one often means taking less of the other, and why the comparison needs care.
A dollar of home equity and a dollar in a retirement account are not the same dollar. Home equity is not income, and reaching it generally means selling, borrowing against it, or refinancing. Money in a traditional retirement account has usually not been taxed yet, so what it is worth to you depends on taxes when it comes out. A Roth account may be treated differently, and early withdrawals can carry penalties. The rules differ by account type, so the same face value can mean quite different things.
I cover the account side in How to split retirement accounts in a divorce. The short version is that you want to compare the two assets on a like-for-like basis, not at face value.
Selling or transferring a home between spouses can also have tax consequences. The IRS explains the general rules in Publication 523, Selling Your Home, including the transfer of a home to a spouse or former spouse. Whether anything applies to you depends on your facts, so confirm it with a tax professional before you agree to a structure.
A plain way to run the numbers
You do not need a model to start. You need a handful of inputs and one honest comparison. Here is the method; the figures are yours to fill in.
Gather these inputs:
- What the house may be worth today, from a current appraisal or a comparison of recent sales, not from memory or a listing site alone.
- What is owed on the mortgage and any home equity loan.
- The cost of selling, if you were to sell, so you can see what is left after it.
- The new mortgage payment you would be quoted on a refinance in your name, from a lender, not from a guess.
- Annual property tax, insurance, utilities and association fees.
- A yearly allowance for maintenance and repairs.
- Your expected income after the divorce, and how long any support is scheduled to last.
- The rest of your living costs.
Then make this comparison:
| Step | Question to answer |
|---|---|
| Total yearly cost of the house | New payment plus tax, insurance, utilities, fees and the repair allowance |
| Share of your income | What portion of your expected income that cost represents, today and after any support ends |
| What you give up to keep it | The other assets you would take less of, valued after tax where that applies |
| What remains | What you would have in accessible savings and retirement accounts, and what it may cover |
| The alternative | The same figures if the house is sold and you rent or buy something smaller |
Run it over five years at least, not only the first. Support may end, a repair may arrive, and a retirement account left to grow may look very different from one that has been drawn down to keep a house. Some people run these numbers and keep the house anyway, which can be a sound choice when it is made knowing what it costs.
Ask before you agree
Before you sign anything that settles the house, I would want answers to these:
- Has the house been valued by someone independent of both of us?
- What would my new payment be on a refinance, and will a lender approve it on my income alone?
- What does the lender need to release my spouse from the loan, and what does the agreement say if I cannot refinance?
- What are all the yearly costs of owning it, and what is my allowance for repairs?
- What am I giving up in return, and have I valued it after tax?
- What does my budget look like once any support ends?
- Who is responsible for the mortgage, taxes and insurance between now and the date the agreement takes effect?
- What happens if I need to sell later, and are there any costs or terms tied to that?
- Have I seen the figures for selling as well as keeping?
When to bring in other people
Each of these questions belongs to a different professional, and it helps to ask each of them the right one:
- Your attorney answers questions about the law and the agreement: how the house is classified, what rights each of you has, and how the buyout and the loan should be written. Rules about property differ from state to state, so I do not state them here, and you should ask your attorney how your state treats the home.
- A lender answers whether you can qualify on your own, at what rate, and what it takes to take a name off the loan.
- A tax professional answers what selling or transferring the home, or using other assets in exchange, may mean for your taxes.
- A divorce financial analyst, which is the work I do, puts the numbers beside each other so the comparison above is done before you decide, and explains what each option may look like over time.
If you are also thinking about the year after the agreement is signed, The first year after a divorce covers what your life may cost and what can wait. If you are weighing the house as one of several trade-offs, Seven financial mistakes to avoid in a settlement is a useful companion.
Frequently asked questions
Can I keep the house in a divorce?
It may be possible, but how depends on your state, on how the house is classified, and on whether you and your spouse can agree on what keeping it involves. Your attorney can tell you what applies where you live. From the financial side, the questions are whether you can afford the buyout and the carrying costs on your own income, and what you would give up to do it.
Do I have to refinance to keep the house?
Not always, but it is common, because a lender usually has to agree before one spouse is released from the loan. Some agreements handle it differently, such as a period of time to refinance or a sale if you cannot. Ask your attorney how the agreement should address it, and ask the lender what it requires.
Is keeping the house better than keeping retirement savings?
Neither is better in every case. They are different assets with different risks and different taxes, so the comparison depends on your situation. The useful step is to value both on a like-for-like basis, after tax where that applies, and to look at what each may mean for you over several years.
Does it matter that I can afford the payment today?
It is a good start, but it is only the start. Repairs, property tax and insurance can change, and support may end. It may help to test the figures against the years ahead, not only the first one.
Where do I start?
With the inputs listed above: a current value, what is owed, a quote from a lender, and your expected income. With those in hand, the rest of the conversation becomes much more concrete.
What to do with this
Gather the inputs first, then run the comparison for both keeping and selling. Take the questions to your attorney, your lender and a tax professional. If you would like the arithmetic done alongside you before you decide, that is what I do, and the first conversation is complimentary.
This is general education about a common decision, not advice about your situation, and it is not legal, tax or investment advice. Rules about property, loans and taxes vary by state and by circumstance, so confirm them with your attorney, lender and a tax professional.
