Rising Interest Rates on Co-Owner Buyouts in a Partitions

The rise of interest rates that started in mid-2022 is a common concern tor co-owners considering a partition action to end their co-ownership of real property. This is because co-owner buyouts, as are common outcome of a partition action, can be harder to accomplish when the buying co-owner must borrow money at a higher interest rate. When this hurdle is added to the fact that the income of selling co-owners will be removed from the equation, many partitions will end in a sale as neither co-owner can afford the property on their own.

What Happens When You Refinance at a Higher Interest Rate?

Rising interest rates have a profound impact on co-owners considering partitioning their property, primarily due to the financial burdens that come with refinancing or obtaining a new mortgage in a high-rate environment.

For example, let’s suppose two people co-owner a $1 million property after paying a standard 20% down payment, leaving a mortgage of $800,000. Refinancing this mortgage from a 3% interest rate to a 7% interest rate will increase the interest by 4%. Using the sum of $800,000 as the principal balance, the initial mortgage payment would have been $3,473 per month at 3%. However, the new mortgage payment would be $5,322 at a 7% interest rate. This is an increase of $1,949 per month based on the increased interest rates. This assumes that the selling co-owner demanded $0 to be paid for their interest.

However, most co-owners in this example would ask for a refinance and $100,000 or so for their equity in the property. Thus, the buying co-owner would need to borrow $900,000. This would amount to a monthly payment of $5,988 just for principal and interest, not including PMI that will be charged since more than 80% of the value will be borrowed on the loan. This would mean the monthly payment will increase by $2,515. For many co-owners, this alone will mean that a co-owner buyout is not possible.

The calculation below shows the basic math behind a co-owner buyout.

mortgage calculator

Assumable Loans in Co-Ownership

Assumable loans allows for the existing mortgage to stay in place with the removal of one or more borrowers, and potentially the addition of a new borrower. Assuming a mortgage would be beneficial if rising interest rates have made a refinance too costly. However, assumable loans are a rarity in partition actions. Even if an assumption is available, the assuming co-owner must still meet loan qualifications, such as a debt-to-income ratio.

Often times, the loans that qualify for assumptions are government-backed mortgages such as FHA, VA, and USDA loans. The overall government-backed share of such home purchase loans, including FHA, VA, Rural Housing Service, and Farm Service Agency loans, “was 28.1 percent in 2022, down from 29.3 percent in 2021.” In 2023, the Federal Housing Administration (FHA) “processed just under 3,350 mortgage assumptions…., up from 2,570 the year prior.”

Lending Tree reports that “conventional loans are rarely assumable” because of the due-on-sale clause, which allows lenders to demand full repayment upon sale of the property. Check with your lender to detemine if your loan is assumable.

Does a Mortgage Impact Your Credit Report?

The mortgage’s presence on a co-owner’s credit report could provide obstacles when purchasing another home. The crux of the issue lies in the debt-to-income ratio, a critical determinant for mortgage qualification. Because mortgage is considered a debt, being tethered to an existing mortgage inflates your debt-to-income ratio, making it exceedingly difficult for you to secure financing for another property. Merely signing a deed transferring your interest in the co-owned property to your co-owner does not relieve you of the mortgage liability on your credit report.

Constraints Co-Owners Face When Determining Whether or Not to File a Partition Action

  1. Affording the Buyout: To complete a buyout, the remaining co-owner must have sufficient funds to pay the other co-owner their share of the property’s equity. If they do not have enough cash on hand, they might consider obtaining a second mortgage or a home equity line of credit (HELOC) to finance the buyout. Unfortunately, securing additional financing at a reasonable interest rate may be challenging in a high-interest environment.
  2. Qualifying for the Assumption with Debt to Income Ratio: For those considering an assumable loan as a solution, the co-owner assuming the mortgage must qualify based on their debt-to-income ratio. Higher interest rates can inflate the required payments on a new mortgage, also known as a refinance, potentially pushing a borrower’s debt-to-income ratio beyond the lender’s acceptable threshold. This makes it more difficult for the remaining co-owner to qualify for the mortgage assumption or to secure additional financing needed for the buyout.

Talkov Law’s Partition Attorneys Can Help

Sometimes, co-owners have tried to resolve their dispute without filing a partition action. Unfortunately, rising interest rates mean that some co-owners will simply be unable to keep their property because current rates make the house unaffordable. Endless negotiation won’t change this fact of the current ecnonomy.

Whether a co-owner buyout is possible or not, a partition attorney can offer specialized guidance to navigate the uncertainties of initiating a partition action in the current economy. If you are seeking tailored advice and representation, contact Talkov Law, California’s premier partition action law firm. For a free consultation, call (844) 4-TALKOV (825568) or reach out online today.

About Scott Talkov

Scott Talkov is a partition lawyer in California. He founded Talkov Law Corp. after more than one decade of experience at a California real estate litigation firm, where he served as one of the firm's partners. He has been featured on ABC 7, CNN, KCBS, and KCAL-9, and in the Los Angeles Times, the Orange County Register, the San Diego Union-Tribune, the Press-Enterprise, and in Los Angeles Lawyer Magazine. Scott has been named a Super Lawyers Rising Star for 9 consecutive years. He can be reached about new matters at info@talkovlaw.com or (844) 4-TALKOV (825568). He can also be contacted directly at scott@talkovlaw.com.

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