How is a house buyout calculated in a divorce?

The arithmetic

There are four steps and none of them are complicated. The difficulty is in the inputs, not the maths.

Step one: the equity. What the house is worth, minus what is still owed on it. If the house is worth $520,000 and the loan balance is $300,000, the equity is $220,000.

Step two: the share. Whatever proportion of that equity the decree gives to the person leaving. If that is half, the buyout is $110,000.

Step three: the costs. Refinancing is not free. There is an appraisal, title work, lender fees, recording fees and so on. These have to come from somewhere, and in most arrangements they are added to the new loan.

Step four: the new loan. It has to pay off the old balance, hand over the buyout, and cover the costs. That is $300,000 plus $110,000 plus the costs.

A worked example

The arithmetic below is the whole calculation on a straightforward file, in the order a lender would run it.

The last line is the one to watch. As the buyout grows, the new loan climbs toward the value of the house, and above certain levels the options narrow considerably.

The two numbers people get wrong

The value. A listing website estimate is not a value. It is a model with no knowledge of your kitchen, your roof, or what the house two streets over actually sold for. For the divorce, you want an appraisal both sides accept. For the loan, the lender will order its own appraisal, and that number is the one that governs how much can be borrowed, whatever the decree assumed.

When those two numbers disagree, and they sometimes do, the loan is sized on the lender’s figure. A decree built on an optimistic value produces a buyout that cannot be funded.

The costs. People calculate the equity, split it, and stop. The costs are real and they are typically several thousand dollars at least, and they make the new loan larger than the simple arithmetic suggests. Leaving them out is how a file that looked comfortable turns tight at closing.

Before and after the split

There are two conventions for where the costs sit, and they produce different buyout numbers.

The common one, and the default used here, is that the costs are added to the new loan and the equity is split before they are taken into account. The departing spouse gets their share of the full equity, and the person keeping the house carries the cost of the transaction.

The other is that the costs come out of the equity before it is split, so both parties share them. That is sometimes what a decree intends, particularly where the arrangement is framed as an alternative to selling.

Neither is right in the abstract. What matters is that the decree says which one, because the difference on the example above is several thousand dollars. The divorce house buyout calculator has a toggle so you can see both.

Where the money actually comes from

The buyout does not have to come out of the house at all, and in a surprising number of settlements it does not. It is simply the most common place to find it.

It can come from savings, if there are enough. It can be offset against another asset, and offsetting against a retirement account is extremely common, because it keeps the mortgage smaller and avoids a refinance that might not be affordable. It can be paid over time, though that creates an obligation between two people who have just finished disentangling themselves, which is worth thinking about carefully.

Working out what the buyout is, and whether the resulting loan is affordable, is the thing to do before the settlement is agreed rather than after. A number that cannot be financed is not a settlement.