Particularly after a lengthy marriage, it's likely that spouses have built up some equity in their assets. With every mortgage or loan payment, they own more and more of the property, and the lender owns less. This equity is a marital asset, and when a couple divorces, each spouse is entitled to a portion of its value. An equity buyout occurs when one spouse keeps the asset and, in exchange, compensates the other for her share of the equity.
Division of Equity
Equity might be divided 50/50 or more unevenly, depending on where you live. In the nine community property states – Wisconsin, Arizona, Washington, California, Texas, Idaho, New Mexico, Louisiana and Nevada – the law treats all marital assets as though both spouses equally own them. In these states, courts divide equity 50/50. In the remaining 41 equitable distribution states, the law allows judges to divide property in a way that seems fair, depending on each spouse's need, contribution to the acquisition and several other factors. In these jurisdictions, the division of equity might be 55/45, 60/40, or even more lopsided.
Cash-Out Refinancing
Divorcing couples typically achieve an equity buyout when the spouse retaining the asset refinances the loan against it for an amount sufficient to satisfy the existing mortgage or loan, plus an additional amount to cover the other spouse's equity interest. This is a cash-out refinance. For example, if a husband were to keep the marital home appraised at $300,000, and the mortgage against it is $200,000, he might refinance for $250,000, enough to pay the wife her half of the $100,000 in equity, assuming the court ordered a 50/50 split.
Offset of Assets
Cash-out refinancing is not always possible, particularly with real estate and in a depressed market. Lenders usually aren't eager to refinance for more than 80 percent of a home's value. If you must refinance your $300,000 home for $250,000 to achieve an equity buyout, the new mortgage would represent approximately 83 percent of the property's value. When this happens, the spouse keeping the home might refinance for 80 percent of the home's value, or $240,000. He would still owe the other spouse an additional $10,000 for her equity, so he might take a separate loan for that amount or give up another asset worth $10,000. He might also elect to give his spouse $50,000 in cash or other assets rather than refinance the mortgage for more than its current balance. Courts don't particularly care how an equity buyout is achieved, as long as both spouses receive their fair share.
Loan Liability
An important aspect of the equity buyout process is that spouses transfer both existing loans and ownership after it's achieved. If a spouse does not do a cash-out refinance to take out a share of the equity, it's important that he still refinance the existing mortgage into his own name. Otherwise, the spouse not retaining the asset would continue to be contractually liable for the loan payments. Likewise, after she has received her equity buyout, she should sign off on her ownership interest in the asset by quitclaim deed or other conveyance. If she does not, the other spouse is liable for loan payments on an asset he doesn't entirely own.