Co-ownership may not be ideal if circumstances change, such as a rift in the couple’s relationship or a significant shift in the couple’s financial situation. The good news is that there are a few ways to avoid co-ownership in Texas without incurring excessive penalties or hardship. An owelty deed or lien is one alternative.
What Is An Owelty Lien In Texas?
Owelty is equality, to give a simple definition. Owelty of partition liens, or simply called an owelty lien, is used in real estate when a split in kind is impossible. This action is commonly utilized in divorces. When a property cannot be physically shared amongst co-owners, this strategy ensures that each owner benefits equally.
An owelty lien is a deed that allows divorcing couples to split the equity in the marital home. In a divorce, an owelty lien is created to buy out the other spouse’s interest in the property.
However, the amount of equity homeowners may access is capped for properties under Texas equity laws. Due to the A6 regulation, often known as the cash-out law, parties would be limited to only cashing out equity up to 80% of the value of the property in Texas, making an owelty lien extremely valuable. Without an owelty lien, owners of the home may never get back up to 95% of the property value.
Cashing in on equity doesn’t have to include going through a divorce. Splitting equity in inheritance is one example. Another would be when one spouse perhaps develops a penchant for gambling. They may not be divorcing yet, but by buying out their gambling partner, the other spouse may safeguard their house from being used as collateral for a loan.
How Does An Owelty Lien Work?
The party giving up their interest in the home obtains a lien on the property. A divorce order specifically designates an owelty of partition lien to them. It is one of the permitted encumbrances on a Texas property.
The value of the owelty lien is paid to the opposite party when the party retaining their interest in the house refinances or sells the property. The “out spouse” gets released from the mortgage in addition to receiving a portion of the equity in cash, while the “in spouse” obtains the full interest in the home.
This spouse would then refinance the property into just their name if the other no longer wants to live there. In other words, one of you may refinance the home into the name of the person already on the contract, making that person solely responsible for the loan. Though it’s preferable for those who can afford it, buying out a spouse is not always doable. As the property was likely bought with the help of two salaries, many individuals find maintaining their mortgage payments to be their biggest hurdle.
Example Scenario: Take John and Nancy. Let’s assume they are splitting and are now turning their attention to their marital home. Their mortgage is $350,000, and their home is valued at $500,000 currently.
The equity they’ve built is $150,000, and they have decided to share it evenly at 50% or $75,000 each. Their divorce decree must specify the owelty, and the owelty lien must be filed with the court clerk to enforce it.
After paying off the existing mortgage (estimated at $350,000) plus John’s owelty lien (estimated at $75,000), Nancy might refinance the house for $475,000. Nancy gives John $75,000 and becomes the house’s sole owner while taking out a new $475,000 mortgage in her name. John’s name is no longer on the deed and the previous mortgage.
However, this hypothetical scenario doesn’t account for other costs associated with a divorce, such as lawyer fees or child support payments, so it’s not a perfect illustration.
The owelty allows the parties to cash out more of their home’s equity and is a tool to utilize the proceeds to settle up with the ex-spouse. But if John and Nancy want to get their hands on almost all of their equity, they can only do so by selling their home.
How Do I Obtain An Owelty Lien?
The owelty lien benefits the party relinquishing their interest in the house. A lawyer’s help is needed to understand Texas home equity laws and create an owelty of partition lien. The owelty lien must be recorded at the county courthouse.
The value of the owelty lien is paid to the other party when the party with the remaining interest in the residence refinances or sells the property. Through this arrangement, one party may buy out the other’s share of the mortgage, acquire full ownership of the residence, and compensate the outgoing party monetarily.
How Do I Get Rid Of An Owelty Lien?
There are typically two ways to get rid of an owelty lien in place: refinancing the mortgage or selling the marital property.
Refinancing is the most typical means to transfer home ownership from both partners to one. You can get the money you need to buy out your spouse by refinancing your mortgage. Refinancing the mortgage loan on the home is often done in conjunction with a buyout.
Typically, the borrowing spouse will apply for a new home loan to acquire the property in just their name. In a cash-out refinance, the spouse buying out the other borrows enough money to cover both their current mortgage and the amount owing for the buyout.
Refinancing may not significantly alter a buyer’s monthly payments while interest rates are low, and it may actually reduce payments if a borrower can get a lower interest rate than they were previously paying. But suppose interest rates are high or expected to rise soon, refinancing might convert a manageable monthly payment into an unmanageable commitment, making it hard to buy your spouse out of the family home. The ideal solution is to sell the property and divide the money between the separating spouses.