If a property owner wants to sell part of their property but still has a mortgage loan on it, they have to obtain this permission and verify that the new parcel is clear to be sold with the appropriate authority, often a county recorder’s office.
Alternate name: partial lien release
Let’s say you purchased a 2-acre parcel of land, with your home located on the edge of the land. If you are approached by a developer a few years into your mortgage who wants to buy 0.75 acres of your land to build on, you’ll need to show your lender that selling that portion of the property won’t leave them with a 1.25 acre property that is less valuable than the remaining principal on the loan. If they see the equity you have in your property as sufficient, they’ll issue a partial release of your mortgage. After completing the process, you’ll be free and clear to sell the 0.75 acres while the lender will still have a lien on the 1.25 acres you own, until you fully pay off your mortgage.
How Does a Partial Release of a Mortgage Work?
A key concept in your mortgage loan is the idea of loan-to-value ratio, or LTV. The higher your loan-to-value ratio, the less likely a lender is to allow a partial release. If you still have a 95% LTV, for instance, and you want to sell part of your property that amounts to 30% of the value, your lender doesn’t have enough collateral to fully secure their investment in you. After all, they’re securing 95% of your loan’s principal with what is now only 70% of the original property’s value. On the other hand, if you’ve paid down your mortgage to where you only owe 20% of the property’s valuation, and you want to sell 30% of your property, you are a fairly safe investment in the eyes of a lender. If you were, for some reason, to stop paying when you still had 20% of your mortgage to go, they’d be able to repossess 70% of the original property to resolve the unpaid debt.
Requirements for a Partial Release of a Mortgage
There are many eligibility requirements for a partial release of a mortgage to occur. In practice, the most requirements involve submitting documentation that proves the following:
You’ve had the mortgage for at least 12 months, in most cases.Your mortgage is current, meaning your account has not been more than 30 days past due within the last 12 months.No borrower can be released from their liability of the loan as part of the transaction.
There will be official paperwork involved, depending on your legal jurisdiction, which your lender can help you find and submit. You’ll then often need a professional appraisal, which will yield a new current value for the whole parcel as well as values for the property after the partial release, and the value of the parcel meant to be released. Finally, the lender may require you to pay a principal reduction, essentially paying ahead on your mortgage to bring your LTV ratio to an acceptable level.
Do You Need a Partial Release of a Mortgage?
The simplest reason to try for a partial release of a mortgage is when you want to sell part of your land, and if you have a partial release clause in your mortgage, it should outline the conditions under which you qualify. However, there are other reasons why this paperwork becomes necessary, including reevaluated property lines, right of way, or easements. Even if the easement or right of way doesn’t substantially change the value of your property, it needs to be officially recorded accurately. When a title search is conducted, such as when you’re buying a home, the title can sometimes come back with an easement on it, making it not a fully clear title. These issues have to be resolved and documented before sale is possible, so officially recording a partial release of the mortgage with your lender and the county recorder or other legal entity helps keep all changes in title to land clearly documented.
Is a Partial Release of a Mortgage Worth It?
In the case of selling a portion of your land, you’ll have to evaluate the costs of appraisals, which can range from hundreds to even a couple thousand dollars for complex cases, as well as whatever processing fee your lender has for a partial release. If you have reason to believe that selling the land now will help you accomplish particular goals, from freeing up capital to lowering your property tax bills long term, you will have to weigh that against the costs of the partial release. If you are considering a partial release solely to free up cash for other purposes, a home equity loan or HELOC could be good alternatives to consider, provided your LTV is low enough. A cash-out refinance is also a method for getting home equity out in cash without dividing up your property.
