How do you make financial decisions equitable when you’re in a relationship?
I recently worked with a client, a single woman, and she and her boyfriend were just about ready to move in together. They both owned their own homes, and he sold his home to move into her home. The boyfriend was planning on giving my client about $1,200 per month to cover costs.
My client was concerned that because he doesn’t have his name on the mortgage, he’s not earning any equity. She said that if he had kept his house, he would have been earning equity in his own home over those years.
My client was interested in any advice or recommendations on how to tackle her boyfriend paying part of her mortgage, and what they would do if they broke up?
It’s all about assumptions
I told my client that it was really nice of her to be thinking about how to make things fair in her relationship. I also told her to remember that fair doesn’t necessarily mean equal. But that relationships can strive toward being equitable.
First of all, there are plenty of scenarios where a person could own a home and have someone living with them, potentially as a roommate, paying rent.
In that scenario, that person’s rent is not viewed as contributing to equity–more likely, rent is there to cover the costs of the increase in utilities, maintenance, and reduction in space available to the homeowner.
This means that of the $1,200 her boyfriend gives you each month, maybe only a tiny portion actually is left to apply to the mortgage.
For example, if you look at an average $350,000 mortgage in the early years, you’re probably only paying down a teensy amount of principal every year. At first, principal ends up being a much smaller piece than interest on your overall mortgage payment. Interest is likely at around $10,500 annually ($350,000 balance x 3% APR = $10,500 = interest portion of your first year of annual mortgage payments). The interest is a much bigger piece of the pie than the equity. Especially at 2023 mortgage rates!When it comes to money and relationships, fair doesn’t necessarily mean equal... but relationships can strive toward being equitable. Click To Tweet
If considering all of these factors, then the idea that living there for a few years doesn’t really merit a credit to your partner in the increase in your home’s equity. But that doesn’t mean there aren’t advantages to him paying you $1,200…in the Seattle area, he’d be hard-pressed to get a good place to even rent for $1,200.
And the boyfriend is not “missing out” on building equity since he sold his home to be with my client. Boyfriend can take the money he received from the sale of his home and invest in something else…so living together does not cause him to miss out on anything. He could even buy a rental property.
I also tell my clients that at some point, when they see that things are definitely pointing toward being in it for the long haul, the non-mortgage-holding partner may take some of their money and “invest” in the home, through paying for renovations or by paying down the mortgage.
If someone is worried about an equitable arrangement…I am a big fan of doing the math! This helps people be clear going in and really understand the nuance of what his contribution means.
Since my client had owned the home for a few years, the boyfriend probably would not be able to come up with 50% equity to make things exactly “even” between the two of them (but rather, things can be equitable). But if they aren’t even, does that create a bigger problem? It’s worth discussing.
When you’re in “phase 1” of living together, maybe things stay the way they are for now (exchanging money to cover housing and shared living expenses). Typically, what I see as “phase 2” of living together would be getting a joint checking account and joint credit card. Since couples would then already have a record of what each person is spending each month, they can deposit that money into the joint account and pay all joint expenses with that money and the joint credit card. They could even get a joint savings account to start saving for shared goals, like vacations.
Finally, “phase 3” is when joint goals start to expand to the long term. Couples might think of starting a family or buying a home together. As lives become more and more entwined, then it’s not just short-term cash resources that merge, it’s also looking at how long-term investments and retirement accounts and savings are coordinating between the two of you.
If a couple can hammer out a domestic living agreement, each side is protecting themselves. And, even though legal agreements are not my area of expertise, I have seen someone who loves you won’t mind having one, because it protects both of you and the assets you’re bringing to the relationship.