How do you determine equity in your home if you are going through the divorce process? It starts with homeownership. If you ask a homeowner if they own their home, you might get a range of answers. While most will say yes, they rarely think in the correct terms of what the value of that ownership means. They are often thinking in terms of renting vs owning, which is partly true, but minimizes what truly defines ownership. Unless you are unencumbered by any other owners, to include banks, you do not “own” the property. Your actual ownership of a property is equal to the equity that you have in the home and until that is 100%, often referred to as free-and-clear, you do not fully own a home.
Do You or Do You Not Own Your Home?
To best understand this, think in terms of a home having value. For this, I am referring to the objective value in the market. While there are subjective and sentimental aspects of the value, this cannot be easily measured and are too dependent upon personal variables to define equity. It is only the price that your home would bring if sold that defines the value. Your ownership is a dollar figure or percentage determined by subtracting any encumbrances or required expenditures. This figure is extremely important to get right because it can be the basis of important life decisions.
Understanding Value and Equity in Your Home
For example, let’s say that you are a homeowner who is ready to sell. You may need the proceeds from the sale for a down payment. Or maybe you intend on downsizing and the proceeds will contribute to your retirement nest egg. You need to understand the real value of the proceeds derived from your equity or you could come up short. In some cases, you may need to sell for financial reasons. If the equity is too low, you would need to bring money to close or short sell to property, the latter of which could have lasting credit impact.
How Do You Determine Equity in Your Home For Divorce?
In some cases, you have to come up with an equity value as part of changing ownership of a home. In situations like divorce, for example, there may even be a court order to sell or refinance a home. The court will not, however, determine the value and equity. As a trained mediator, I can tell you that this can be a really complex process. Usually, the spouse being paid will want to assume the highest value net of the mortgage. The paying spouse, on the other hand, will look to limit the value while maximizing costs which reduce the equity. Reality, in most cases, is somewhere in the middle of the range and looking clinically at the value and costs will help reach a equitable solution.
So then, how do you determine equity in your home when going through divorce? Here are some of the considerations that I bring to the discussion when I mediate for divorcing couples.
When determining the equity of your home, you need to account for any liens on the property. Most often, the liens are associated with a mortgage, but liens can also be attributed to other non-lender-based liens such as unpaid back real estate taxes. Your first step should be to subtract all liens from the value.
This is a tricky one. Some items that impact the safety or structural soundness of a property are likely essential and should always be built into a calculation. Other maintenance items may be more aesthetic in nature. While these may seem optional, they could also contribute to a higher value and more equity. I would categorize things like painting, re-grouting, tub refinishing and renewing cabinets. This can be very complex, so you should always get help.
If you decide to use a realtor, which may people do, you should be considering their commissions. This is not a news flash for most sellers, but when you have a refinance in conjunction with removing a borrower as with a divorce, this becomes a bit more convoluted. The main thing to remember is that the property will be sold some time in the future and the individual retaining the property will likely incur those costs. If not accounted for in the net equity at the time of the refinance, this cost will decrease the net equity for one of the previous owners. This is not to say that the full amount needs to be in the mix, but the cost should be discussed and addressed as a consideration.
Many municipalities use the transfer of ownership as an opportunity to fill the treasury and, like realtor commissions, this cost will be incurred IF it is the seller’s responsibility. Unlike realtor fees where a seller can choose not to use a realtor, there is no way around these costs. As a result, these should be part of the discussion. There are some easy resources to find out if these fees apply to an individual property.
Find What’s Right For You
The aforementioned costs are not all encompassing. In the end, there is no one size fits all formula. For example, some situations also have very specific characteristics like improvements that had been financed by one individual and not the other or gifts from one owner’s family. It is more about an agreed upon methodology for all individuals involved. When I mediate these situations, I generally recommend that everyone agree on how the equity will be determined without any discussion of the numbers. This alleviates the positional bargaining trap and make it much easier to have a good discussion about the equity and when in doubt get some help. There are many situations that I see where couples can use focused mediation on something like equity determination without incurring the cost for a complete mediation.