Divorce is a complicated and emotional procedure that involves dividing assets and debts. For many couples, their home is one of the biggest assets. Unless a trust or prenuptial agreement addresses it, the mortgage on your home is considered part of the marital estate.
What To Do With the Home
When dividing marital assets in a divorce, deciding what to do with the family home can be tough. There are three main options:
- Sell the house and divide the proceeds.
- Keep the mortgage in both parties’ names and rent the property.
- Allow one party to take over the mortgage and ownership of the home.
However, before deciding, consider the financial implications. If you want to keep the house, assess whether you can afford the mortgage payments on your own. Don’t forget other related expenses, like maintenance and taxes. A good rule of thumb is the 28/36 rule. With that, homeowners should spend no more than 28% of their gross monthly income on housing costs and no more than 36% on debts, including the mortgage.
Can You Split the Mortgage?
Deciding what to do with a mortgage after the end of a marriage may seem simple. However, the process can be quite complicated. Selling the house is the easiest way to handle it.
Sometimes, one of you wants to keep the home. In that scenario, you need to retitle the property before any changes can be made to the mortgage. The person giving up the house must sign a quitclaim deed to remove their name from the title. A New Jersey family law attorney can help with this process.
When a divorcing couple has a joint mortgage, they may choose to remove one name from it. As a result, that leaves the other party as the sole borrower. This can be done through either refinancing or assuming the original mortgage. However, taking on an existing mortgage is not an option in many situations. For that reason, refinancing is the more common route.
Refinancing is more beneficial when interest rates have gone down since the initial purchase. However, immediate refinancing may lead to higher monthly payments if the mortgage rates happen to rise. You may not have time to wait, as some divorce decrees stipulate that refinancing must be completed within specific time frames. Additionally, the spouse wishing to keep the house must qualify for the new loan based on income and credit score.
How To Handle the Issue of Home Equity
Home equity is an important asset that estranged couples can use to settle their finances while going through a divorce. This is the difference between the current market value of the property and the amount owed on the mortgage. Typically, divorce agreements specify how home equity is to be divided, which can be a source of cash for both parties.
If one spouse wishes to keep the house, they may need to buy out the other’s share. That can be accomplished through a cash-out refinance, where a larger loan replaces the original mortgage and provides the necessary cash difference.
What About Taxes?
Divorce and a home sale can result in income taxes that need to be paid. When married couples file jointly, they can sell their primary residence without paying capital gains tax on the first $500,000 of profit. However, individuals filing as single taxpayers after getting divorced qualify for an exclusion of only the first $250,000 of profit.
Reach Out to a New Jersey Family Law Attorney
Divorce can be a complicated process, and in particular when estranged couples are dealing with their mortgage obligations. If you would like to learn how the terms of your existing mortgage can affect your divorce, talk to a New Jersey family law attorney at Morgenstern & Rochester. Our law firm offers various family law services to clients throughout Cherry Hill and its surrounding areas. To arrange a consultation, call us at 856-489-6200 or fill out and submit our contact form.