When two people purchase a home together, co-ownership may not last forever. Spouses can divorce or friends can have a falling out. In either event, continued joint ownership of real estate becomes difficult or impossible. A mortgage buyout is one solution. It involves one partner purchasing the equity interest of the other who's not remaining in the home.
A buyout necessitates identifying the equity in the property – the difference between the mortgage balance and what the property is worth. If $150,000 in equity exists, typically you'd be entitled to $75,000 and your partner would be entitled to $75,000, so you'd have to come up with $75,000 to buy her out. An inaccurate value can shortchange one party or the other, so an appraisal is necessary to establish exactly what the property is worth. Appraisals are usually the most accurate, unbiased assessments of value, but you could also ask a realtor to do a comparative market analysis or do your own research into what other properties in your neighborhood are selling for.
Assuming you and your partner both have sufficient borrowing power, either of you can buy out the other with a cash-out refinancing. The amount of your equity may become a factor, however. For example, if your home is worth $300,000 and the mortgage against it is $150,000, you'd have to refinance for $225,000 – $150,000 to pay off the old mortgage and $75,000 to pay your partner's share of the equity. This represents 75 percent of the property's value, so a lender is likely to be amenable if you have good credit and the income to qualify on your own. If your home is only worth $240,000, however, you'd need to refinance for $195,000 – $150,000 to pay off the old mortgage plus $45,000 to buy out your partner. This results in a mortgage equal to 81 percent of your home's value, which might deter some lenders or, at the least, require you to pay for private mortgage insurance.
Mortgage buyouts typically occur in divorce situations, and this gives you an additional option. In a divorce, you're dividing not only the equity in your home, but all your other marital property as well. In this case, an offset can save you from taking out a new mortgage that's significantly larger than your old one. You can give up other assets to whittle away at some of your spouse's equity interest in the property. For example, if you have an investment account worth $100,000, you and your spouse would probably each be entitled to $50,000 of that in a divorce. If you gave her the entire account in lieu of doing a cash-out refinance to buy her out, you've subtracted $50,000 from her equity interest in the home. If the home has $150,000 in equity, you now owe her only an additional $25,000. If the home has only $100,000 in equity, you can refinance the existing mortgage into your own name without taking out anything more.
Mortgage buyouts require the cooperation of both owners. If one owner refuses to sell her share of equity to the other, you may have to petition the court to force the issue. This happens automatically as part of divorce proceedings, but if you're not married to your co-owner, you still have options. You can file a complaint for partition, asking the court to sever your joint ownership, which would allow you to get your money out of the property. A court can order your partner to buy you out, or vice versa, under some circumstances. This might happen if one of you clearly can afford to do so, but the other cannot. More likely, however, the court will order the sale of the property. Each of you can take your rightful share of the proceeds after the mortgage is paid off and start over again in a new property.
- Freddie Mac: Cash-Out Refinance Mortgages (PDF)
- DivorceNet: Negotiating a House Buyout at Divorce
- National Paralegal College: Rights and Duties of Co-Tenants
- Adinolfi & Lieberman: Top 5 Things to Consider When Buying Out your Spouse's Interest in the Marital Home
- First National Bank of St. Louis: Cash-Out Refinance? Don't Forget the PMI
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