George Carlin said that a house is a just a place to keep your stuff while you go out and get more stuff. But we know that a house is more than where we keep our stuff. It’s where we raise our families and bring people in our lives together. In the context of divorce, the house takes on tremendous meaning, perhaps more than it normally would. It can become a source of continuity, stability and familiarity during a period that is anything but stable or familiar. But is that the right choice? More importantly, is that the right choice for you? Let’s explore the options, keeping in mind you might contemplate the answer using different viewpoints; some financially based, others not.
Financially, should you keep the house?
Typically, in many cases in the Westchester County area, the couple may have the flexibility of choosing between different marital assets in a divorce settlement. These assets could include retirement plans, the marital home, or other valuable assets like an investment account or rental property. Keep in mind that a home is not only a place to live, but a major consumer of cash, as opposed to an investment account, which can be a generator of cash. You’ll want to prioritize your assets and lifestyle habits in a balance between the ‘users’ and ‘generators’ of cash. Houses have a voracious appetite for capital.
Can you afford to stay? How will you know?
‘Should you’ stay in the home is different from “can you afford to” stay in the home. ‘Should you’ is a personal decision, whereas ‘can you’ is a bit more analytical. There are some guidelines set forth by the Consumer Financial Protection Bureau which might help you, which state that up to 43% of your income can be used for a qualified mortgage payments and other revolving debt. In other words, if you have gross monthly income of $20,000, you should have no more than $8,600 in debt payments. Remember, you have property taxes, income taxes, AmEx bills, cars, food, etc to pay. Bottom line- if you are uncomfortable with the finances going into the decision, seek professional help to assist with the process as everyone’s circumstances are different.
Does a new life equal new housing?
We’ve found that while many individuals prefer to stay in the house, some clients look forward to a fresh start in a new home. That new home may be a temporary rental, or perhaps a new purchase. In either case, it’s important to take your time with the decision as the upfront costs- packing, moving, brokerage commissions, deposits, acquisition costs if applicable- can add up. We’ve found that there aren’t any wrong answers to this question, only the one that works for your circumstances. I’d note that if you are trading the marital home for another marital asset and the marital home equity is greater than 20-25% of the marital estate, ask your attorney to have a neutral appraisal done. Zillow and Redfin price estimates are well-meaning but notoriously inaccurate with regard to their valuations. This could lead a substantial difference in proceeds in your settlement.
A bit of both?
Clients sometimes feel that once they make a housing decision, that it is cast in stone, never to be altered again. However, you do have flexibility. Many times, if there minor children still in the school system, the custodial parent will choose to stay put until graduation, or until the youngest child graduates from college, then downsize or relocate. Again, the collaborative process allows for this type of flexibility and along with your counsel and financial professional, you’ll be able to fashion an agreement that contemplates all the stages of your post-divorce lifestyle.
Do you know the real costs to carry?
Once clients decide to remain in the home and choose to buy out the spouse for their half ownership, we’ve seen them budget for only the major expenses related to the home, such as the mortgage payment, taxes, and insurance (PITI). But what about the rest? Oil, gas, electricity, repairs, septic, snow removal, landscaping, etc. All are ongoing expenses, not to mention a leaky roof, a boiler repair, repainting or general maintenance. What about that cracking driveway that needs replacement for $30,000?
What about if you have a change of heart and want to move? What will it cost you to sell? For a $1,000,000 home, there could be a $60,000 brokerage fee, repairs, staging, moving expenses, closing and attorney expenses. These selling expenses could top $100,000. Assuming you had no mortgage and had already bought out your spouse’s half for $500,000, you would receive proceeds of $400,000 for your half, or 20% less than your spouse received. For the same house.
The professionals in the collaborative process are well-versed in these matters. They will help work with you through these questions so that when your head hits the pillow at night, you’ll be comfortable with your housing decision, regardless of where that might be.