WASHINGTON — In working with clients going through a divorce, the decision about where to live can be challenging. This can be one of the first decisions to make during divorce proceedings, but is often not considered in advance.
Add to that the very real emotional, practical and often significant financial implications, and there may be confusion about the right course of action. Every situation is unique, and while one route may have worked well for a friend or family member, that doesn’t necessarily mean it will be appropriate for you.
At times, the trade-offs required to execute what you want to do are greater than you realize. This is where working with an adviser can be helpful. At the very least, an adviser can guide you in understanding the potential costs and what you may have to give up as you consider your options.
If you don’t have an adviser, or if you’re simply exploring the possibility of divorce, here is a list of things to consider as you analyze your options. We provide six key questions for you to ask before you make a final decision, as well.
In the end, deciding where you will live is really a matter of balancing the emotional, practical and financial implications of the three major options you have — staying in your current home, buying a new home or renting.
Staying in your home
The emotional aspect of having to sell or leave your family home is very real, especially if you have minor children. One of you can avoid moving and other costs, should you or your spouse stay in your home. For that person (and any children), there can be real value gained from keeping one aspect of life certain while so many other things are changing. Another benefit may be the proximity of your neighbors who may lend support during your family’s transition. The challenge here is that it’s difficult to quantify the value of these intangible benefits.
When it comes to the financial considerations of staying in your home, it’s important to have a very detailed list of all the costs including ongoing maintenance, cleaning, taxes and utilities. Major repairs that may be on the near or longer term horizon, such as a new roof or outdoor painting, should be added to the costs when calculating total cash flow required to keep the home. If the mortgage and other expenses are manageable, staying in your home may make this option cheaper than buying a new home or renting. However, this is a function of many factors, not the least of which are current real estate market conditions and how much equity you have in your home.
If you are or your spouse is assuming the mortgage, you’ll also need to consider whether you have the monthly cash flow and the financial capability to qualify for a mortgage. This can be problematic if the spouse staying has little to no reportable income or is receiving alimony that won’t support the cost of the home. In those cases, if there are enough assets, you may be able to obtain an asset-securitized loan. Bear in mind that paying the monthly mortgage does not qualify as an amount toward alimony or child support, so one spouse paying the mortgage on a home occupied by the other would need to be spelled out in a Divorce Agreement.
Continuing to own the home jointly is an option, but carefully consider whether you want to remain attached financially to your future ex, and whether you can depend on them to hold up their end of the bargain by sharing in future post-divorce costs. If a transaction is negotiated between you, you’ll want to review all the financial and tax implications of transitioning ownership. You’ll be negotiating a buyout transaction that will require agreement on price (usually based on one or more appraisals), transaction date, and could have tax implications for one or both parties.
Buying a new home
While many divorcees prefer to stay in their existing home (and may fight hard for that in negotiations), others use this transition period as an opportunity to make a desired change. There can be value in having a chance to live in a new location, or explore a new living style while also being able to “right-size” your home for the future. Under the right real estate market conditions, you also may gain an opportunity to build equity which starts you on a path toward greater wealth.
On the flip side, there are many upfront costs when buying a new home, so you’ll want to be realistic about the impact they have on your financial situation and the total cost of this option. Moving costs may include new furnishings and renovations on the new property, in addition to the transactions costs, such as a down payment and settlement costs, such as home inspections, closing costs, and insurance on the purchase. Remember that cash for these items may be in short supply if joint accounts are frozen, negotiations take longer than expected, or if attorney’s fees are high. These costs turn into sunk costs if you later decide on a different location or change your opinion about your desired lifestyle — a real risk if you’re making this decision in haste or in the midst of other challenges that arise during a divorce.
Just as in the case of assuming a mortgage on your existing home, if you choose to buy a new home you’ll first need to qualify for a mortgage. Check your current credit score and overall debt and income levels, and consider asking a financial institution to prequalify you to confirm how much of a loan you can obtain. Getting financing in the middle of a drawn-out divorce may be harder than you anticipate, especially if you’re starting a new job, or if most of your net worth is tied up either in an illiquid business or in a jointly owned home that is under water or needs to be sold.
Renting
I often recommend renting for a period of time during and after a divorce, mainly because it tends to be a time of high emotion and a lot change — not ideal circumstances for sound decision-making. Finding a temporary location also gives you the time and space to sort out what lifestyle you want post-divorce, and gives you more flexibility to change your mind as your new single life evolves. Depending on the cost, renting may free up cash flow for other priorities, such as starting a retirement account or starting a business. Maintenance emergencies will be someone else’s responsibility and, other than potential rent increases or high utility bills, you’ll likely have fewer surprise expenses as a renter. That can be helpful during the transition from paying bills as a couple to shouldering all the costs on your own.
Renting is also a good option for parents with children in their late teens as they may need or want to stay in a particular neighborhood for schools, but buying in that area may be cost-prohibitive. Although these days it can be difficult to predict whether college-aged children will return home, many times when children are heading off to college in the next three to four years, renting is a good option until they leave the nest.
Once you sort through the pros and cons of these three main options and decide which is best for you, we suggest you double check your decision using these six probing questions:
- Is the location convenient to my work and social communities?
- How does this choice meet the needs of my children now and in the next five years?
- Does the home’s size and layout suit my new single lifestyle?
- What are the tax implications of the required actions?
- Have I considered the total costs for each option, including estimates for maintenance and other factors?
- If I make this choice, what am I giving up in my other financial goals?
When a marriage ends, finding a new home can be one of the most challenging decisions. While there is a lot of advice to help you make a decision, there really is no one right answer for where to live. Consider each of your options by carefully weighing the emotional, practical and financial impact and ask yourself the hard questions. If you do, the chances that your final decision will be right for you are much greater. That’s a decision you can feel good about.
Dawn Doebler, CPA, CFP®, CDFA® is a senior wealth adviser at The Colony Group. She is also a co-founder of Her Wealth®.
