Q: I own an investment property with a partner who wants out. Both our names are on the deed, the mortgage is in his name only. We have $30,000 left on the mortgage.

My partner agreed to sell his share of the house to me for $30,000 (the amount left on the loan) and remove his name from the deed. My lender informed me that I can’t just pay off the mortgage, but must get the home appraised and get my own loan for the appraised amount. He said I cannot even just get a mortgage for the remaining $30,000 owed.

I’m unclear why I must do this if I already own the home. Why can’t I pay off the $30,000 loan and remove my partner’s name from the deed?

A: Your gut feeling about your situation seems correct. If you owe a mortgage balance of $30,000 on your home, you should be able to pay that amount off and be done with the lender. If you need a new loan, you should be able to get a new $30,000 mortgage, pay off the old mortgage and be done with it.

I’m not sure what your current lender’s issue is, but I do know that many lenders try to avoid loans that are as small as yours is. To underwrite a new loan for $30,000 will cost the lender as much money as a loan three times that size.

If you and your partner agreed that you would have the sole obligation to repay the $30,000 on the loan and that would settle all amounts between the two of you, you might be able to obtain an equity line of credit for $30,000 that you can take out in your name to pay off the other mortgage. Your interest rate may be higher, but you may not have all of the expenses associated with taking out a first mortgage.

You’ll have to compare the costs of a new first mortgage with the costs of a home equity line of credit (HELOC) to see which is the smarter move.

You may also want to shop the loan around with other lenders to see if you can get a better deal with another lender. You can try a savings and loan or a community bank in your area as well as a national mortgage lender.

Keep in mind that the property is an investment property and some investments properties are harder to finance these days that they were a couple of years ago. If you find it difficult to obtain financing for the investment property, you might try to obtain the financing by using your primary residence – if you have equity in it. While using your primary residence to take money out to pay off your partner isn’t ideal, and potentially could put your property at risk, it gives you an additional option for financing.

June 03, 2009