New Jersey Divorce Lawyers Blog
Once you have determined who owns the marital real estate, the next question is whether there is equity in the property to be distributed. Equity is the monetary value of the property if it were to be sold. A few examples will illustrate the concept of equity:
Example 1:
Husband and wife own a home worth $500,000
The bank is owed:$300,000
The equity To Be Distributed is:$200,000
If the property is sold Husband will receive $100,000 and Wife will receive $100,000.
Example 2:
Husband and wife own a home worth $300,000
The bank is owed:$300,000
The equity To Be Distributed is:$0
If the property is sold Husband will receive $0 and Wife will receive $0.
Example 3:
Husband and wife own a home worth $275,000
The bank is owed:$300,000
The equity To Be Distributed is:-$25,000 (negative equity)
If the property is sold Husband will owe $12,500 and Wife will owe $12,500.
Distribution of the Equity Through A Sale or Refinance Of the Property
Let’s look at Example 1. Since there is equity in the marital home it can be distributed to the parties in a few ways. The parties can agree to list the house for sale and split the proceeds after paying their share of the closing costs. Or one spouse can buy out the others interest in the property.
In the example above, let’s say that the wife wanted to remain in the house and the husband agreed to vacate and transfer his interest in the house to the wife. Assuming that wife has no other way to pay husband $100,000, and assuming that husband wants a full value buyout of his interest (he could always agree to accept less than full value), wife can buyout husband’s $100,000 interest by borrowing $100,000 against the equity in the property. Wife would accomplish this through a refinance. Essentially wife would be raising the loan on the house from $300,000 to $400,000, which would increase her monthly housing costs. However, she would now have 100% ownership of the house free and clear of the husband’s interests, and husband would be fully bought out and able to move on and get another property.
However, let’s say wife cannot refinance the property into her sole name due to her credit being sub-par, or the equity being insufficient to meet the bank’s lending requirements, or because she does not want to go further into debt due to a refinance. If she has the income she may be able to pay husband for his equity on a monthly basis. For example, if husband’s equity in the house is $100,000 wife may be able to pay him $20,000 per year for five years to buy him out. Alternatively, if husband owes wife alimony or child support she may be able to use that stream of income as an offset against monies that she owes husband for the house. For instance, if husband owes wife $20,000 in alimony for 5 years, wife can propose that husband keep his income and sign the house over to her. Using the same logic, if wife is entitled to a portion of husband’s retirement assets, or a portion of husband’s financial assets, she can offset her entitlement to a portion of husband’s assets against husband’s interest in the house.
Timing of Distribution of Equity
Once the method of distributing the house is agreed upon, the next issue to tackle is the timing of the distribution. The parties are free to agree on the timeline that they will use to distribute the equity in the property. One option is for the refinance or sale to take place on a short timeline of 3 – 6 months. Another option is to stretch out the timeline to 18 months – 2 years or longer, if both parties agree.
The timing of the distribution is influenced by a number of factors. If husband is vacating the property and he needs the buyout money to buy another place, the timeline for distribution may be shorter. If the parties have children in school and/or the children are nearing graduation from high school, the timeline may be longer. (See related blog post).
Whatever your individual circumstances, do not hesitate to contact me if you have any questions about how to divide the equity in your house as you separate or divorce. If you live in Bergen, Hudson, Passaic, or Essex county, and you need a divorce lawyer who has experience in resolving issues relating to how best to divide equity in the marital home, give me a call at 844-431-3380. Or e-mail me using the e-mail contact form. The consultation is free.