By: Joseph Goldy, CFP®
For many people going through a divorce, a common decision that needs to be made is whether to keep the marital home. At first glance, the person considering remaining in the home may feel like the monthly cost is lower than renting. However, divorcees need to complete a careful analysis to ensure all costs of homeownership are factored in.
Understandably, the decision to stay or move will also be based on several non-financial factors such as work opportunities, school system, quality of life, and proximity to family and friends. The amount of time you plan on staying in the home is also an important variable that should be considered in conjunction with the financials.
Interestingly, according to Freddie Mac, the share of sole-person households has more than doubled since 1980. Based on a statistical model Freddie Mac created, three demographic factors were cited as predictors of sole-person homes. Along with age/generation and race/ethnicity, marital status was highlighted as a significant factor in forecasting the growth of sole-person households.
The Cost of Homeownership
Often during a marriage, there is one person who handles the finances and manages the household budget. That person is closely familiar with the many costs of operating the home since they see the bills coming in and funds going out to cover the necessary ongoing expenses of maintaining the home. Unfortunately, the spouse who may be considering keeping the house might not be as familiar with these costs.
Perhaps the most significant financial risk to the person keeping the home is that a big-ticket item fails and needs to be replaced. Roof replacement, furnace or boiler conversion/replacement, HVAC, electrical or plumbing systems, windows, and septic systems are some of the most expensive repairs that will come up while owning a home.
These items are all subject to wear and tear and will need to be replaced or repaired, at a high cost, at some point during homeownership. Although some of these expenses can be financed by the homeowner, adding a new, unexpected monthly budget item, usually with interest, can be a burden and is not ideal from a planning standpoint.
In addition to the big-ticket expenses just mentioned, there are myriad ongoing costs that can also add up. These include property taxes, homeowner's insurance, club/HOA dues, exterminators, septic and furnace maintenance, landscaping services, security system, gutter cleaning, chimney sweeps, and garbage collection. Renters may enjoy the benefit of not having to cover many of these ongoing costs.
For example, some rentals roll the cost of utilities into the monthly rent, and the town may cover garbage collection through property taxes which you wouldn't be responsible for as a renter. (Although ostensibly baked into the monthly rent amount.)
Another challenge beyond the cost of home maintenance is getting approved for a mortgage. If the spouse looking to take ownership of the marital home has not worked for a period, qualifying for a mortgage will be difficult.
This situation will vary among mortgage companies, but if the goal is to remove one person from the mortgage post-divorce, the remaining person needs to be approved for a mortgage refinance. This refinance will involve all the income history, credit score, and debt-to-income criteria that would typically be required for any traditional mortgage.
The Cost of Renting
The actual cost of renting will depend on the terms of your lease, what town you live in, and what expenses your landlord has agreed to cover. For example, some landlords require that the tenant cover a particular repair expense, maybe the first $100 or $200, while others do not have this requirement. Many landlords will cover extermination costs or gutter cleaning, while some will leave it up to the tenant to bear these expenses.
A considerable, albeit one-time, expense that the divorcee must budget for is the initial upfront costs to get into the rental property. On top of moving costs, the real estate agent's fee, security deposit, and first month's rent are all due simultaneously before moving in.
For example, suppose you are looking at a rental that is $3,500 a month. That could easily add up to over $13,000 needed upfront when considering the first month's rent, real estate agent fee (often one month's rent), 1 ½ month's security deposit, and moving costs.
With renting, knowing that you will not be responsible for replacing the boiler or installing a new roof can provide some needed peace of mind for a divorced person while they regain their financial footing. However, that comfort comes with a cost.
Not maintaining ownership in an appreciating asset and building equity over time is one downside to renting. It can feel like throwing away money each month when renting since you'll never really own the property.
Despite this common view, it could be argued there is a cost/benefit tradeoff to everything, and housing is no different. Looking at renting as throwing away money just because you will not own the property is too simplistic when considering all the other costs involved in homeownership.
Deciding to be a homeowner or renter after a divorce is a big decision that can impact your financial plan. As can be seen, both have their pros and cons that will need to be carefully considered. Working with an advisor post-divorce to create a realistic budget and cash flow analysis is a valuable exercise that will help clarify the actual cost of housing and ensure you will not miss something that could jeopardize your plan.
Joseph Goldy, CFP®, is a wealth advisor and CERTIFIED FINANCIAL PLANNER™ at Highland Financial Advisors, LLC, a fee-only fiduciary wealth advisory firm based in Wayne, New Jersey.
Joe specializes in working with newly independent women because of divorce or losing a spouse. He understands firsthand the value of having a clear financial picture pre- and post-divorce and a plan to restate goals as a single person. When he is not helping clients, Joe enjoys spending time with his two sons outdoors and volunteering to help raise money for Type 1 diabetes organizations.