Going through a divorce is one of those times where we really need to tune in to our money. While still reeling from the shock and pain, we have to work to put a plan in place with respect to our money and to protect ourselves financially. What to do with the house is usually one of the first questions asked.
As most people’s largest asset, your first instinct is to “keep the home” for a host of reasons, including giving kids the stability we think they need, or just being attached to a place and not feeling we can uproot our homes while family and the relationship are in flux.
However, my experience has been that it seldom makes sense to “keep the home.” If you keep the home, and that is the family’s largest asset, you’ll have to give up other assets to make it balance out when everything that is owned gets divided. At a time when you most need to rethink and be sure to right-size expenses, you might be saddled with a home that is too expensive to maintain or it’s not the right time to sell.
The arguments for buying a home, or in this case, keeping a home, versus renting are meaningful. First of all, in most markets, the amount of money a person spends on rent over time is about the same or less than the amount a homeowner spends on a mortgage. When you first purchase a home, the mortgage payment covers mostly interest. As time passes, more of each payment goes toward paying down the balance or principal of the loan itself. So every mortgage payment is a form of savings because it increases the amount of your home that you own, known as the “equity” in your home. Renters are not able to build equity with their monthly payments.
Also, if you have at least 20% equity in your home, you either have or can get a long-term fixed-rate mortgage (ideally 30 years), to ensure you will have the same payment month after month, year after year. This provides a sense of stability that a renter does not have. Rents are often increased every time the cost of living goes up.
Many of these arguments are turned upside down when you are going through a divorce. This is the time to keep expenses low and long-term commitments to a minimum while you stabilize your income and all of the other aspects of your life. It’s most likely a time to stay flexible and mobile and low cost, which is what most rentals allow you to do.
This is easier said than done for many of us. I “kept the house” because I felt it was right for my kids, and then had to try to sell it right in the middle of the market downturn of 2008-2009. I got much less than I most likely would have if I had sold during the divorce. I hope that others will take advantage of what I learned the hard way and at least take a serious look at this advice.