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Navigating Divorce in Minnesota: Understanding Homestead Allocation and Mortgage Considerations

by | May 17, 2024 | Family Law Topics

Going through a divorce is undeniably one of life’s most challenging experiences. It’s not just the emotional toll that weighs heavily; there are also numerous practical considerations, especially when it comes to dividing assets like your home. For couples in Minnesota, understanding how a homestead can be awarded and how mortgages are handled during divorce proceedings is crucial. Additionally, in today’s economic landscape, where interest rates are fluctuating (and often much higher than the divorcing parties’ current mortgage interest rate), financial considerations become even more complex.home for sale

Homestead Allocation in Minnesota   The term “homestead” refers to the primary residence shared by the couple. The state’s laws provide several options for handling the homestead and any other marital real property during divorce proceedings:

  1. Sale and Equitable Distribution: One common approach is to sell the home and divide the proceeds equitably between the spouses. This option may be chosen if neither party wishes to keep the home or if selling it is the most financially prudent decision. When determining how to divide proceeds, it is not necessary to divide them equally, per se.  Remember that the overarching objective is for an equitable division of the entire marital estate as a whole – not just home proceeds.  The proceeds will be divided equitably in a collective sense, along with all other marital assets and debts.
  2. Equity Buyout: If one spouse wishes to keep the home, they can buy out the other spouse’s share of the property’s equity. This involves determining the home’s fair market value and negotiating a buyout amount, which can be accomplished through mediation or litigation. A buyout can be accomplished in ways other than a cash payment.  For example, if a couple has enough marital retirement and investment assets, one spouse could decide to keep the house (and all equity) and the other spouse could take investment/retirement assets of roughly equivalent value.  Creating a fair division, on balance, can be achieved a number of different ways… and even over different time periods.
  3. Co-Ownership for a Period: In some cases, especially if young children are involved, divorcing couples may choose to co-own the home for a certain period post-divorce, allowing children to maintain stability. Eventually, the house can be sold, or one spouse can buy out the other’s share. This can be tricky.  Ideally each spouse would have their own legal representation so that all risks/benefits can be considered most fully in discussion with counsel.  This maximizes the chances that the divorcing parties end up with a fair and workable arrangement.
  4. Deferred Sale: The court may order or the parties may agree to a deferred sale of the home, delaying its sale until a specified event occurs, such as the youngest child reaching adulthood. This relatively uncommon arrangement allows the custodial parent to remain in the home until the agreed-upon time.

Handling Mortgages in Divorce  Divorcing couples must also address the mortgage associated with their homestead and any other marital real property. Some common approaches include:

  1. Refinancing: If one spouse is retaining ownership of the home, they may choose to refinance the mortgage in their name alone. This removes the other spouse’s financial liability and ensures that the remaining owner can afford the mortgage payments on their own. This option becomes more unattractive in housing markets like the one we are currently in, where many couples have a house with a mortgage interest rate that is far lower (even half) the current interest rates.  Having legal counsel and discussing options with lenders can be useful in finding a fair solution for both parties in this circumstance.
  2. Assumption of Mortgage: In some cases, the spouse retaining the home may be able to assume the existing mortgage, keeping the terms of the original loan intact. However, this option typically requires lender approval and may involve certain conditions.
  3. Sale of Home: Selling the home and paying off the existing mortgage is often the simplest solution. It allows both spouses to move forward without the burden of joint homeownership and mortgage obligations. This is a less attractive option for couples wishing to maintain as much stability for young children, however.
  4. Remaining Co-Borrowers on the Mortgage Post-Divorce: In some instances, divorcing couples may choose to keep both parties on the mortgage even if one spouse is leaving the homestead. This arrangement can occur for various reasons, such as financial constraints or the desire to maintain good credit standing. However, it’s essential to proceed with caution and consider the following:
    • Financial Responsibility: Even if one spouse vacates the homestead, both parties remain legally responsible for the mortgage payments until the loan is refinanced or paid off. This arrangement requires a high level of trust and communication to ensure that payments are made on time to avoid negative consequences for both parties’ credit scores.
    • Trust and Communication: Co-ownership of a mortgage post-divorce necessitates ongoing communication and cooperation between ex-spouses. Both parties must agree on how major financial decisions regarding the property will be made, such as refinancing or selling, to prevent conflicts and ensure a smooth transition.
    • Legal Protections: It’s advisable to include provisions in the divorce settlement or a separate agreement outlining each party’s responsibilities regarding the mortgage, including who will reside in the homestead and how expenses will be divided. This document can serve as a safeguard in case disputes arise in the future.
    • Future Plans: Couples opting for co-ownership of a mortgage should consider their long-term plans regarding the property. Eventually, one spouse may wish to buy out the other’s share or sell the home, necessitating a clear understanding of each party’s rights and obligations.

More on the Impact of High Interest Rates  In today’s economic climate, where interest rates are relatively high compared to previous years, divorcing couples must consider the implications on their financial decisions:

  1. Affordability: High-interest rates can affect the affordability of mortgage payments, making it challenging for one spouse to retain the home, especially if they are solely responsible for the mortgage post-divorce.
  2. Refinancing Costs: Refinancing a mortgage to remove one spouse’s name from the loan may be more expensive when interest rates are high. Couples should carefully assess whether refinancing is financially viable in the current interest rate environment.
  3. Property Value: Fluctuating interest rates can impact property values, which may affect the buyout amount or the decision to sell the home. It’s essential for divorcing couples to obtain updated appraisals to ensure an accurate assessment of the home’s value.

Conclusion  Divorce is never easy, but understanding the options available for allocating a homestead and handling mortgages can help divorcing couples navigate this challenging process. In Minnesota, couples have various options for dividing their primary residence, from selling the home to co-ownership arrangements. Additionally, addressing mortgage considerations, especially in the context of high interest rates, is crucial for making informed financial decisions. Ultimately, seeking guidance from legal and financial professionals can provide clarity and support during this transitional period.