How to go about acquiring an ownership stake in son’s house

Question: I plan to buy half of my son’s house, and we will use it as a rental as he is buying another house to live in.

What is the best way for me to finance this? I have plenty of equity in my house. Should I get a mortgage on my home or on half of his house? He would like to keep his present loan.

Or is a line of credit a better option on my house? I have the 20 percent cash down to start with. Is the interest on equity loans deductable at tax time?

Answer: You have asked several questions, so let’s take them one at a time.

First of all, in order to buy “half” of your son’s house, you must go on title as “tenants in common” with a 50 percent ownership of the house.

This can be accomplished with a simple quit claim deed, with your son transferring 50 percent ownership of the house to you and filing the quit claim deed at the county recorder’s office.

The way you handle the financing on the property would depend on when the quit claim deed is recorded.

If your son transfers title to you before you get the financing, you could refinance his house as co-borrowers with your son because you would both be legal owners of the property.

If you want to get a loan before you transfer title, you could structure a “purchase” transaction where you obtained a purchase loan with your son as a co-borrower to buy out his interest in the house.

It would be easier and less complicated to go on title first and handle the financing as a mortgage refinance. So let’s assume that is what you will do.

You mentioned that your son wants to keep his current mortgage. You need to be aware that virtually all mortgages include a “due on sale” clause that may be triggered if you are added to the title of the property.

Technically, the mortgage lender could force you to pay off the entire loan if they find that you have violated that clause. But realistically, as long as the mortgage payments are made on time each month and your son stays on title to the property, that probably won’t happen. You just need to be aware of that risk.

The next question is how much equity does he have in the home? You will have to pay him for a 50 percent share of that equity somehow. If you decide to refinance the house that you now own with your son, you would have to obtain a “non-owner-occupied” (investor) loan on the property.

The interest rate on a rental property mortgage is significantly higher than for an owner-occupied home. But the main problem with this strategy is that mortgage lenders have significantly tightened their loan guidelines for investor properties lately, so it may be difficult to borrow much money over and above the current loan balance on the property unless there is a lot of equity in the home.

So your best option is to borrow against the equity in your own home. You could get a home equity line of credit, but there are a couple potential problems with that. First, banks have tightened their lending rules for home equity loans severely, so you may have trouble finding one. Second, home equity lines have a floating interest rate, typically tied to the prime rate.

The prime rate is very low right now, but it can and will go up in the future, which would increase your monthly loan payments. If you own your current residence free and clear, or have a small mortgage balance on it, you are probably better off getting a “cash out refinance” to come up with the cash to buy half of your son’s house because you can currently get a 30-year fixed rate loan in the low 4 percent range.

Either way you go, with a line of credit or refinancing your current home, the interest expense will be tax deductible. You will also be able to deduct half of the property taxes, insurance and maintenance and repair costs on the rental house.

Please consult an accountant for further tax information because this column is intended for general information purposes only.

Steve Tytler is a licensed real estate broker and owner of Best Mortgage. You can email him at features@heraldnet.com.