Recently, I was asked the following question: “If R puts 20% down on a home and splits the monthly mortgage payments with C, what’s an equation that reflects each person’s ownership interest? My boyfriend bought a house for $400K and put 20% down ($80K). The mortgage interest rate is 4.25%. What equation reflects my ownership interest if we split monthly mortgage payments (around $2200)?”
There are a couple of elements to this answer. The first is what’s “fair” financially, the second is what is “legal”.
To determine what’s “fair” financially, you will need to start with an amortization table and also know the date the loan was originated. For illustration, I will assume the loan origination date is 1/1/2017 and we are talking about a 30 year fixed rate mortgage. Enter the loan amount, terms, rate and origination date into the table at the top left to get this:
This shows that your monthly mortgage principal and interest payment is $1574.21. (If you are paying ~$2200 per month, the difference is for insurance and taxes.) It also shows what you are paying toward principal vs. towards interest each month – look at columns G and H and note that these amount vary each month.)
To determine how much each has earned, assuming you are splitting the equity earned equally, add up the principal paid over a given period of time, then divide by 2, as demonstrated here:
In addition to the equity earned through paying the mortgage, you can earn equity through an increase in the market value of the home. How you divide this is up to R and C. If you want to split it evenly, then you would consider the sales price, minus the sales transaction fees, minus your purchase price, then split whatever amount is remaining.
From a legal perspective, unless C is on the title/deed or there is a written agreement between R and C, C is not necessarily earning any equity in the home. (The laws here are somewhat dependent upon where you live.) If C is not on the title/deed, then I highly recommend that R and C put in writing that they will split the mortgage payment and that each will equally earn an equity above and beyond the 20% down payment provided by R. This step is necessary because you are not married; even if you are married or get married eventually, it is worth putting this in writing as well, potentially as part of a prenuptial agreement. Legally, C’s contributions to the mortgage can be considered rent paid to R. (I highly recommend the book– this covers many situations such as this one and helps you understand how to protect your financial interests in a relationship, whether dating, engaged, married or in divorce.)