Divorce Real Estate: Calculating The Equity in Your Home
You've decided to go your separate ways and now it is time to divide the assets you've accumulated during the time of your marriage. Typically the equity in the home represents a significant portion of those assets so care must be taken to understand the equity position of the home.
I'm often asked to provide a Fair Market Valuation for the purposes of not only establishing a value, but so that equity can be calculated.
While "value" is one of the pieces in establishing equity and "mortgage balance" is another one, there are often many other pieces that are overlooked, resulting in a miscalculation of the true equity. So what else should you be looking at to determine the real equity of the home?
Many people assume that the balance on their mortgage statement represents the payoff amount. Mortgage payoffs (which is different from "mortgage balance"), for example, can be filled with unanticipated fees and costs. These are the down-to-the-penny figures that reflect any and everything needed to satisfy the loan in full.
If the loan is a “negative amortization” loan, the monthly payments do not cover the interest. Therefore, the loan balance has been increasing since its inception. If the loan is, or ever was, in foreclosure, then additional fees will apply, and these fees are typically not reflected in a mortgage balance.
There can also be "pre-payment penalties" and, more recently, "deferred principal balances" due to loan modifications. A recent case involving an equity buy-out turned up an $80,000 deferred principal balance the parties did not know about. This required some unraveling of other equalized assets in the case.
Some of the popular energy-efficient rehab programs are financed through programs such as PACE or HERO, and those loans are wrapped up in property tax bills. They, too, must be paid when a home is sold, so pulling tax bills is an important part of discovery.
Lastly, personal liens and judgments can affect the available equity, because title companies typically require these to be satisfied in either a house buy-out or sale. Things like income tax liens, HOA liens and personal judgments should all be discovered before calculating equity.
The formula now looks something like this:
Property Value – The Sum of: Mortgage payoffs, homeowner’s association balances, outstanding property taxes, income tax liens, outstanding judgments, PACE loans, etc. = EQUITY
The documents you'll need include:
Mortgage payoff (not a statement)
Homeowner's Association (if applicable) balance
Property tax bill
Personal and property lien and judgment search
Lien and judgment current balances (aka., "payoffs" or "demands")
Should you have any specific questions regarding your situation or case, feel free to give me a call. I’m happy to talk through some scenarios. Hope this helps.