My sister and I are co-owners of a townhome that was held in trust by my mom. I want to buy my sister out, but I am not sure how to approach the loan. I have several options, but don’t know the best alternative.
The house is worth approximately $90K with no existing mortgage. Thus, I want to pay her $45K.
I have a VA loan that I could purchase as a first and conventional is an option. Additionally, my credit union is offering a revolving HELOC.
Should I approach this as a first mortgage or is a HELOC a favorable option?
If you go conventional first mortgage, you will want to keep the loan-to-value under 80 percent, so you don’t have to pay PMI. That means you want to keep the loan under $72k. Given that you already own half, that probably shouldn’t be a problem. The expensive part will be closing costs (recording the mortgage, origination fees, title search, title insurance, etc.). A $70k mortgage is pretty small and these fees will likely represent a sizable amount. Go online to one of the mortgage shopping websites and see what interest rates and fees would be for a $70k loan.
Your other option, as you mention, would be a home equity loan. If you keep the LTV low, say around 50%, you should be able to get a home equity loan easier and at lower cost than a traditional first mortgage. You will need to check with your local credit unions and banks to find out the terms (primarily the interest rate and closing costs) of home equity loans. The interest rate will be higher for a HEL, but the closing costs should be lower.
An alternative might be to do a deal with your sister and pay her off monthly, if she doesn’t need the cash up front. You would still have lawyers and search fees, but the total cost would be lower.
That’s actually a good idea, if she would rather receive a monthly stream of payments. You could come up with payment of her half over whatever time frame suits your budget. There are websites where you can easily see what the payments look like, such as:
You and your sister would need to determine how “official” you want to get. At the least, you should prepare a loan agreement, which can be either simple or complex, depending on how protected your sister wants to be. It can be recorded it at the county courthouse if she wants it to be known to other creditors as an official debt and lien on the property. If this scenario is appealing to you and your sister, ask the lawyer who will prepare the transfer deed about preparing a loan document, however complex you and she decide is necessary.
If you decide to go this way, the interest you pay will still be deductible for you, and the interest she earns will be income for her. The amortization schedule you decide on can provide the annual interest amounts. It can be a win-win, allowing you a less costly loan, and yet provide her with more interest income than she can get at a bank.
Official is the way to go. You may have the best of intentions - but if you end up with a problem, she should be protected. We can mention worst case scenarios, like incurring massive medical debt, or a flood that ruins the property, or you get hit by a car and the will isn’t correct so she loses, etc. (or half-title remains hers until paid off, so she loses it somehow and you’re up the creek). Simplest for all parties is to have it as official as possible.
Your sister must declare the interest as income whether or not you do so and whether or not you take a deduction. Things get more complicated if the interest rate is below the market rate.