Dividing Home Equity During a Divorce

Dividing equity in a home during a divorce is undoubtedly one of the most difficult and emotionally charged aspects of the process. For many couples, the family home is not just the largest shared asset, but also a place filled with memories and sentimental value. As divorce unfolds, deciding how to divide this equity fairly can be a challenging task, especially if one spouse wishes to keep the home or if both parties have made significant financial contributions over time.

Calculating Equity in Your Marital Home

Home equity is the difference between the property’s market value and the outstanding balance on your mortgage. To calculate equity in your marital home, follow these steps:

Determine the Current Market Value: Start by finding the current market value of your home. This can be done through a professional appraisal or by reviewing recent sales of similar homes in your area. Online real estate tools can also give an estimate, though they might not be as accurate as an appraisal.
Subtract the Outstanding Mortgage Balance: Next, subtract the remaining balance on your mortgage and any other liens on the property. You can find this information on your most recent mortgage statement or by contacting your lender.
Account for Other Costs: If you plan to sell the home as part of the divorce, you should also subtract selling costs, such as real estate agent commissions, closing fees, and repairs needed to prepare the home for sale. These costs will reduce the total amount of equity available to divide.

For example, if your home is appraised at $400,000 and you owe $250,000 on the mortgage, the equity would be $150,000. If you decide to sell the home, further deductions for selling costs could lower the amount you and your spouse ultimately split.

How Is Marital Property Divided in Alabama?

In Alabama, marital property is divided using the principle of equitable distribution, which means assets are divided fairly but not necessarily equally. The court considers several factors to determine what is fair, including the length of the marriage, each spouse’s financial contributions, the earning potential of both parties and their individual needs.

Marital property includes assets acquired during the marriage, such as the family home, joint bank accounts, and retirement benefits. Separate property (assets owned by either spouse before the marriage or received individually as gifts or inheritances through the course of the marriage) generally remains with the original owner unless it was commingled with marital property.

Alabama judges have discretion in dividing assets, and while an equal 50/50 split might occur in some cases, the court’s goal is to achieve a fair outcome based on the circumstances of the divorce.

Different Ways to Split Equity in a Marital Home

When it comes to dividing the equity in a marital home, there are a variety of different options available for couples. These include:

Selling the Home and Dividing the Proceeds

One of the most straightforward approaches is to sell the home and split the proceeds between both spouses. After the mortgage is paid off, along with any other liens or debts tied to the property, and after accounting for selling costs (like real estate agent commissions, closing fees, and necessary repairs), the remaining equity is divided between the spouses.

Advantages:

Both spouses walk away with cash, making it easier to start fresh without any lingering ties to the property.
It eliminates future disputes over home maintenance, property taxes, and mortgage payments.

Challenges:

The timing of the sale might affect the market value and selling in a down market could reduce the proceeds.
Both spouses will need to find new housing, which can be a financial burden if the proceeds from the home sale do not cover future housing costs.

One Spouse Buys Out the Other

If one spouse wants to keep the marital home, they can buy out the other’s share of the equity. To do this, the spouse keeping the home typically refinances the mortgage in their name alone, securing a loan large enough to pay off the existing mortgage and compensate the other spouse for their share of the equity.

For example, if the home’s value is $400,000 with $200,000 left on the mortgage, and the equity is $200,000, the buying spouse would need to take out a loan that pays off the mortgage and covers half of the equity ($100,000 to the other spouse).

Advantages:

This allows one spouse to remain in the home, which can provide a stable environment for the children to grow in.
The spouse being bought out receives their share of the equity upfront, which they can use for housing or other expenses.

Challenges:

The buying spouse must qualify for a new mortgage, which can be difficult if their income alone is not sufficient to meet the lender’s requirements.
The buying spouse also takes on full responsibility for future home maintenance, mortgage payments, and property taxes.

Co-Ownership for a Set Period

Some divorcing couples choose to retain joint ownership of the home temporarily, allowing one spouse (or sometimes both) to stay in the house for a set period before selling it. This arrangement is often used when the couple has children and wants them to remain in the family home until a certain milestone, such as graduating from high school. After that point, the home is sold, and the equity is divided.

Advantages:

Provides stability for children, allowing them to stay in a familiar environment until a natural transition point like finishing school.
Delays the need for an immediate sale, which might be beneficial if the housing market is unfavorable at the time of the divorce.

Challenges:

Co-ownership can lead to disputes over home maintenance, mortgage payments, and property taxes, particularly if one spouse lives in the home and the other does not.
Both spouses remain financially tied to the home, which can make it harder to move on and secure new housing or mortgages.

Trading Assets

Instead of splitting the equity in the home, one spouse can choose to give up their share of the home in exchange for other marital assets of equal value. For example, one spouse can keep the home, while the other can get a larger portion of retirement savings, investment accounts, or other valuable property. This method works well when there are other significant assets to divide.

Advantages:

The spouse keeping the home does not have to secure a large mortgage or cash payout to buy out the other spouse’s equity.
It can be a practical solution when one spouse is emotionally attached to the home or if keeping the home is important for stability, particularly for children.

Challenges:

The spouse giving up the home cannot benefit in any way from future appreciation in the home’s value, which could be a significant loss.
This method can work only if there are other assets of comparable value to trade, which might not be the case with most couples.

Deferred Sale

In some cases, particularly when children are involved, divorcing couples can opt for a deferred sale. Under this arrangement, one spouse (usually the custodial parent) stays in the home with the children for a specific period of time, often until the youngest child reaches a certain age or graduates from high school. After that, the home is sold, and the equity is divided at that time.

Advantages:

Allows children to remain in a stable living environment during a difficult period.
Delays the need to sell the home during an inopportune time in the housing market or when neither spouse is ready to move.

Challenges:

Both spouses remain financially tied to the property, even if one no longer lives there.
Disputes might arise over how to handle home repairs, mortgage payments, and property taxes during the deferred period.
The spouse not living in the home might feel financially burdened by the arrangement, as they have to find a place for them to live.

Talk to Our Alabama Family Law Attorneys Today

When it comes to dividing equity in your marital home during a divorce, the importance of having an experienced and skilled legal team on your side cannot be overstated.

At Smith Law Firm, our attorneys have decades of experience in handling complex family law cases, including the fair and equitable division of marital property. With extensive trial experience and a deep understanding of Alabama’s property division laws, we can protect your financial interests as well as your spousal and parental rights and go above and beyond to achieve a fair and equitable outcome.

If you are facing a divorce and need to ensure a fair division of your marital home, call Smith Law Firm today at 334-702-1744 or use our online contact form to schedule a consultation with a member of our legal team.