With the recent housing market collapse so near in the rear-view mirror, there are still plenty of couples out there that choose to divorce, but are either underwater on the primary home or don’t have enough equity yet for the spouse who wants to stay, to refinance. So are there creative solutions can we offer? Absolutely!
Let’s assume that the Wife will stay in the home with the children but won’t likely be able to refinance for 5 years. Let’s also assume that the current mortgage is in joint names and that Husband wants to do what he can to facilitate Wife staying as long as it doesn’t jeopardize him or his financial future. The first decision he has to make is whether he wants to participate in the growth of equity for the next 5 years or not. For today’s illustration, we’re going to say “yes”, he does.
Here are the other pertinent details: Mortgage payment with taxes and insurance is $1500 per month. Market rate rental for the home would be $2700 per month.
So think of it this way, both parties are in effect, now landlords of their home and will invest in it 50/50 until it is either sold or refinanced at a date 5 years from now. So they will split the costs that a landlord would typically pay, mortgage, interest, insurance, major repairs and maintenance. Now, Wife has to “rent” the home from them both. So her “rent” is $2700 to the couple, half of which is hers, meaning in addition to her half of the mortgage, $750, she must also pay $1350 rent for a total of $2100 per month plus any utilities and monthly upkeep. Since the total mortgage payment is $1500, she can just pay it and then pay Husband the difference of $600 per month. Each year, they will split the deduction for mortgage interest and taxes.
An important benefit of this arrangement is that if Husband wants to buy a new home on his own, this scenario allows him to offset his portion of the mortgage payment with rental income to help preserve his ability to obtain a new mortgage if he chooses.
Lastly, every time I do a scenario like this I recommend protections be written in for the non-residential spouse. Typically it will be required that each month the payer spouse must provide proof of mortgage payment and if at any point, the mortgage is more than 30 days past due, the non-residential spouse can order the sale of the home immediately. This gives at least some sort of protection in the event that the mortgage payments become too much to handle for Wife.
Where there’s a will there’s a way and most couples can make this work fairly easily as long as they are willing to be cooperative.