You have two main financing options to buy out someone’s ownership stake in a property you own jointly: a cash-out refinance and a home equity loan or line of credit (HELOC). The option that is right for you depends on the amount of proceeds you need and how much equity you have in the property.
With a cash out refinance you refinance the existing mortgage on the property and use any remaining proceeds to buy out the other owner. Please note that if you take out a mortgage on a property that you already own and any portion of the proceeds goes toward anything other than paying down an existing loan on the property, the mortgage is technically considered a cash-out refinance.
The qualification requirements and mortgage terms for a cash out refinance are different than for a rate and term refinance when you take out no loan proceeds. For a cash out refinance of a single unit property you live in such as a home, condominium or co-op, the maximum loan-to-value (LTV) ratio is 80%.
The maximum LTV ratio for a multi-unit property with up to four units is 75%. The maximum LTV ratio for a cash out refinance of an investment property is 70% to 75%.
This means you can take out a maximum of 70% to 80% of your property value when you refinance, depending on the property type and number of units. If you want to use a cash out refinance to buy out someone’s ownership interest, you need to make sure there is enough proceeds leftover after paying the existing mortgage on the property.
Use ourCASH OUT REFINANCE CALCULATORto determine the proceeds you can take out of your home
For example, if a single unit property is worth $100,000 and has an existing $50,000 mortgage, the maximum amount of proceeds you could take out to buy out someone’s ownership interest is $30,000.
Property Value: $100,000
(x) LTV Ratio: 80%
(=) Maximum Loan Amount: $80,000
(-) Existing Mortgage: $50,000
(=) Proceeds You Can Take Out: $30,000
So in the example above, if the other person’s ownership stake in the property is worth $30,000 or less, you are good to go. If the ownership interest is worth more than $30,000, you may need to consider an alternate financing method or the person may be willing to sell a partial stake in the property instead of their full stake. This is why it is important to make sure a cash out refinance meets your financing objectives before you apply for the loan.
Another point to consider about a cash out refinance is that the mortgage rates tend to be moderately higher than a regular refinance. We recommend that you contact multiple lenders in the table below to find the best loan terms for a cash out refinance.
If you have significant equity in the property and you need a larger loan to buy out the other person’s ownership interest then a cash out refinance is usually the best financing option. If you have less homeowners equity and need a smaller loan amount then a home equity loan or HELOC may be a better option.
With a home equity loan or HELOC, your existing mortgage remains in place and you use all of the loan proceeds to buy out the other property owner. Benefits of a home equity loan or HELOC as compared to a cash out refinance include lower closing costs and total interest expense.
This approach also benefits you if you already have attractive terms on your mortgage. Depending on your loan terms, the monthly payment for your mortgage and home equity loan may be less than the payment for a cash out refinance.
Plus, the maximum combined loan-to-value (CLTV) ratio for a home equity loan or HELOC may be higher than for a cash out refinance, which enables you to take out more proceeds to buy out the other person and potentially for yourself. For example, some lenders permit a CLTV ratio of 85% to 90% for a home equity loan or HELOC on a property you live in.
Additionally, if you choose a HELOC, you can draw down and repay the line an unlimited number of times during the draw period. This financing flexibility may enable you to buy out the other owner’s person’s ownership stake over time instead of all at once.
The table below shows home equity loan and HELOC terms for leading lenders. We recommend that you shop multiple lenders to find the best interest rate and fees.
The final point we should highlight is that if you want to remove the other person from the mortgage in addition to buying out her or his ownership interest, you can only accomplish this by refinancing the existing mortgage. If you select the home equity loan or HELOC option, the other owner remains on the existing mortgage until that loan is refinanced, even if she or he no longer holds an ownership interest in the property.
"Understanding Cash-Out Refinances." My Home by Freddie Mac. Freddie Mac, 2019. Web.
“My lender offered me a Home Equity Line of Credit (HELOC). What is a HELOC?” CFPB. Consumer Financial Protection Bureau, September 25 2017. Web.