What kind of mortgage do you need to buy out someone on a home you own together?
You have two main financing options to buy out someone’s ownership stake in a property you own jointly: a mortgage 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 standard refinance -- also known as a rate and term refinance -- you use a new mortgage to pay off the existing loan on the property and use the remaining proceeds to buy out the other owner. Please note that there must be an existing mortgage on the property to qualify for a rate and term refinance. If the property is owned outright you are ineligible for a rate and term refinance.
If you want to personally receive more than $2,000 or 2.0% of the mortgage amount in proceeds (whichever is lower), you need a cash-out refinance instead of a standard refinance. The mortgage rate and fees for a cash-out refinance are higher than for a standard refinance and the qualification guidelines are more challenging. For example, for a cash-out refinance of a single unit primary residence the maximum loan-to-value (LTV) ratio is 80% as compared to 97% for a rate and term refinance.
For a two-to-four unit owner-occupied cash-out refinance, the maximum LTV ratio is 75% as compared to 85% for a two unit standard refinance and 75% for a three-to-four unit property. For an investment property, the maximum LTV ratio for a rate and term refinance for a one-to-four unit property is 75%. For a cash out refinance, the maximum ratio for a one unit investment property is also 75% but only 70% for a two-to-four unit property.
The higher the LTV ratio, the higher the mortgage amount you can qualify for. This means that in most cases you are eligible for a higher loan amount with a rate and term refinance than with a cash-out refinance. For this reason a standard refinance is typically advantageous if you have limited equity in the property.
This is an important point to keep in mind because you need to make sure there is sufficient loan proceeds remaining after paying off the existing mortgage on the property to buy out the other person's ownership interest .
Use ourCASH OUT REFINANCE CALCULATORto determine the proceeds you can take out of your home
The example below demonstrates the maximum mortgage amount and loan proceeds that can be used to buy out an ownership stake for a regular refinance (Case 1) as compared to a cash-out refinance (Case 2). The example assumes a one unit owner-occupied property valued at $100,000 with an existing $50,000 mortgage.
Case 1: Maximum Proceeds With a Regular Refinance
Property Value: $100,000
(x) Maximum LTV Ratio: 97%
(=) Maximum Loan Amount: $97,000
(-) Existing Mortgage: $50,000
(=) Proceeds You Can Use To Buy Out Other Owner: $47,000
Case 2: Maximum Proceeds With a Cash-Out Refinance
Property Value: $100,000
(x) Maximum LTV Ratio: 80%
(=) Maximum Loan Amount: $80,000
(-) Existing Mortgage: $50,000
(=) Proceeds You Can Use To Buy Out Other Owner: $30,000
This example illustrates how a standard rate and term refinance provides significantly more proceeds to buy out another owner's interest in a property. If your goal is to maximize the funds available for the buyout, then a regular refinance is the right program. If you want to maximize the proceeds you personally receive, then a cash-out refinance is the right approach.
Another point to consider is that loan terms vary depending on the type of refinance. We recommend that you contact multiple lenders in the table below to find the lowest mortgage rate and costs for the refinance program that best meets your objectives.
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If you need a larger loan to buy out the other person’s ownership interest then a refinance is usually the best financing option. If you need a smaller loan 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 or part of the loan proceeds to buy out the other property owner. Benefits of a home equity loan or HELOC as compared to a refinance include lower closing costs, reduced total interest expense and more financial flexibility.
This approach also benefits you if you already have attractive mortgage terms. Depending on your interest rate, the monthly payment for your mortgage and home equity loan may be less than the payment for a refinance.
Plus, the maximum combined loan-to-value (CLTV) ratio for a home equity loan or HELOC may be higher than for a refinance -- depending on the property type and if you live in it -- which enables you to access 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 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 compare terms and 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 typically 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.
Sources
"Understanding Cash-Out Refinances." My Home by Freddie Mac. Freddie Mac, 2019. Web.
"B2-1.3-02, Limited Cash-Out Refinance Transactions." Selling Guide: Fannie Mae Single Family. Fannie Mae, August 7 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.
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