How Is Equity Determined in a Divorce?

In many situations, the family home is the most valuable asset in a divorce. It is common for spouses not to agree on how to treat this asset that they both may have been paying for during a number of years. However, determining the equity of a home is a vital component to reaching a final divorce settlement.

Options Regarding House

There are usually several options regarding how to treat the house during a divorce. However, the decision that is made about the house will be based on the most sensible choice given the circumstances. In some situations, one spouse may buy out the other spouse’s interest in the home. This usually involves refinancing the home in one of the spouse’s names so that the other is completely off of all obligation documents.

The spouse who keeps the house may take out a loan large enough to pay off the existing loan and pay the other spouse the amount of equity that he or she is owed. For example, a house may have an existing mortgage on it of $100,000 and equity in the same amount. Therefore, such a loan would likely require $150,000 to pay $50,000 to the selling spouse and to pay off the existing mortgage. In some instances, one spouse may exchange his or her ownership interest in the house in exchange for other marital property or for not having to provide spousal support to the other spouse. However, a refinance is usually required so that the other spouse will not be liable for the existing debt on the property.

Another option is to sell the house before the divorce is finalized. This involves putting the house on the market and closing on the house before the divorce is finalized. In some instances, spouses want to sever their relationship before the home may be sold. In this instance, the divorce settlement may specify that the spouses are to split the sale proceeds equally or in another manner as agreed by the spouses or ordered by the court.

Some spouses may not want to sell the house and may continue to be co-owners of the property. This provides the benefit of each spouse still being able to benefit from the appreciation of the property. However, it also keeps the spouses financially entangled, which can be a problem if one spouse does not make payments as expected.

Determining Equity

It is important for the spouses to have a solid and accurate figure related to the amount of equity in the home. This amount is what will ultimately be provided or divided between the spouses. The equity of a property is the market value of the home less the existing debt and costs to divest the asset. The spouses may mutually agree on the value of the property. Conversely, they may disagree because they have different interests in valuing it at a higher or lower amount. It is important not to agree on an equity value that is much different than it is in reality because this can create an imbalance in the marital estate. A real estate appraiser can provide an appraisal on the value of the property. Another option is to get a real estate agent to provide a market analysis in order to estimate the value of the property. The most expensive way to value a property is to have the divorce court judge rule on it.

Dividing Equity

Once the amount of equity is determined, the spouses can come to an agreement about how to divide the equity between them. If both of the spouses worked during the marriage and contributed equal amounts to the mortgage that they acquired after marriage, a 50/50 split is usually reasonable. However, issues can arise if one spouse put separate property toward the purchase of the home or there were unequal contributions toward the mortgage. Additionally, a spouse may have already owned the property at the time of the marriage, but the other spouse may have contributed to the upkeep of the mortgage, made mortgage payments or made investments into the property that impacted its value. In these cases, a spouse may be entitled to these contributions. In these situations, the attorneys representing the spouses may try to negotiate a settlement that takes these factors into consideration.

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