How to Divide Home Equity in a Texas Divorce

First, Calculate the Home Equity

Home equity is the home’s current market value minus the outstanding mortgage balance and any other liens. That figure is what gets divided between spouses.

Start with a realistic value, usually an appraisal or a lender’s valuation tool, then subtract what is still owed. If a home is worth $500,000 with a $300,000 mortgage, the equity to divide is $200,000. Texas is a community property state, so equity built during the marriage is generally divided in a way the court considers “just and right,” which often but not always means evenly. Separate property, such as a home one spouse owned before the marriage, may be treated differently and must be proven with clear records. How the equity is split is a legal question for your attorney under the Texas Family Code; how it gets paid out is where financing comes in.

Option 1: Sell the Home and Split the Proceeds

Selling the home is the simplest division: the house is sold, the mortgage and costs are paid, and the remaining proceeds are divided between the spouses.

This is the cleanest break financially: neither spouse keeps the property or the mortgage. It makes sense when neither party wants the home, when neither can qualify to refinance on their own, or when both prefer the cash. The downsides are the disruption of moving (especially with children), selling costs such as agent commissions, and market timing.

Option 2: Buy Out Your Spouse With an Owelty Lien

An owelty lien lets one spouse keep the home and pay the other their share of the equity through a refinance, and in Texas it can reach 95% loan-to-value instead of the 80% cap on a standard cash-out refinance.

This is the path for the spouse who wants to keep the house. The spouse keeping the home refinances into a new loan that pays off the existing mortgage and pays the departing spouse their equity share, and the departing spouse is removed from both the mortgage and the deed. The mechanism that makes this work is the owelty lien, a claim written into the divorce decree that secures the departing spouse’s payment. To understand the instrument itself, read what is an owelty lien.

The Texas advantage is significant: because an owelty refinance is treated as rate-and-term rather than cash-out, it can reach up to 95% of the home’s value and avoids cash-out pricing. We break that comparison down in owelty lien vs. cash-out refinance in Texas, and the qualifying details in owelty lien refinance requirements.

Why a Divorce Decree Alone Does Not Remove You From the Mortgage

A divorce decree divides property between the spouses, but it does not change the mortgage contract with the lender, so a refinance is almost always required to actually remove a departing spouse from the loan.

This catches many couples by surprise. The decree can order that one spouse “takes” the house, but the lender is not a party to the divorce and is not bound by the decree. Until the loan is refinanced into the keeping spouse’s name alone, both ex-spouses remain legally responsible for the mortgage, and a missed payment damages both credit profiles. An owelty refinance solves this cleanly: it both funds the buyout and replaces the joint loan with a single-borrower loan, severing the departing spouse’s liability at the same time their equity is paid.

Option 3: Continue Co-Owning After the Divorce

Some couples agree to keep co-owning the home for a set period after divorce, often so children can stay in place, and sell or buy out later.

This defers the decision rather than resolving it. It can ease a transition, but it keeps both ex-spouses financially entangled: both typically remain on the mortgage, both carry the liability, and disagreements about upkeep, payments, and timing can resurface. Couples who choose this path usually set clear terms in the decree for when and how the home will eventually be sold or bought out, frequently via an owelty refinance down the road.

Other Financial Factors to Weigh

Beyond who keeps the house, weigh the existing mortgage rate, your standalone affordability, the costs of refinancing, and how the decision fits the rest of the marital estate.

A few practical considerations often tip the decision. If the current mortgage carries a low interest rate, refinancing into today’s rates to buy out a spouse raises the monthly payment, worth modeling before committing. Affordability on one income is the threshold question: a payment two incomes supported may strain one, and lenders will test this through your debt-to-income ratio. Refinancing also carries closing costs, which factor into whether keeping the home pencils out. Finally, the home rarely stands alone in a divorce: keeping the house might mean giving up a larger share of retirement accounts or other assets to balance the overall division. These trade-offs are where your attorney and a lender each play a role: the attorney on how the home fits the full property settlement, the lender on what the refinance would actually cost and whether you qualify.

Which Option Is Right for You?

If neither spouse wants or can afford the home, selling is usually simplest. If one spouse wants to keep it and can qualify for the refinance on their own income, an owelty buyout is typically the smartest financial path in Texas because of the 95% LTV and rate-and-term pricing. Co-ownership is a temporary bridge, not a permanent answer. The deciding factor for keeping the home is usually whether you can qualify for the refinance alone, which is worth checking with a lender early, ideally before the decree is finalized through a divorce mortgage prequalification.

This article is educational and not legal advice; your attorney determines how equity is divided in your decree. On the financing side, Herring Bank can tell you what you would qualify for. Call 1-682-267-9742 or apply online to start.