NEW YORK (TheStreet) -- After happily dating you've decided to move in with your significant other. Congratulations!
Now it's time to address a headache-inducing issue: If you start chipping in on the mortgage payment, how would the two of you divvy up the home equity if you were to part ways? Or suppose one of you was run over by a bus. How would the equity be apportioned between the survivor and the other partner's heirs?
The two of you can agree on anything you want, of course, but you could set up a system that would also make sense to anyone else with a stake in your estates, such as children from previous relationships. Here's how.
First of all, the home's initial owner -- let's call her Jane -- would have sole right to the equity built up before party No. 2 -- John -- starts chipping in. If Jane paid $200,000 for the home 10 years ago and it's now worth $250,000, that $50,000 in additional equity is hers. So get the current value appraised, or agree on a number after checking values on sites such as Zillow.
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Jane is also entitled to get back her down payment. Let's say that was $20,000. So the first $70,000 from a sale goes to Jane.
She also has a right to the equity created by paying down her mortgage balance before John came along. If she started with a $180,000 15-year loan five years ago at 6%, she'd now owe about $137,000. So that's another $43,000 in equity that belongs to Jane, bringing the total to $113,000.
The lender will know the loan balance, which will also be on the annual statement that should have come in January. For a month-by-month balance, fill out the Mortgage Loan Calculator, check the circle marked "Report Amortization Schedule by Month" and click "View Report." The popup will show how much of every month's payment goes to principal and interest and how much debt remains at the end of each month.
OK, now John starts pitching in. Let's assume he pays half the monthly payment of $1,519. The amortization schedule will show how much equity he buys each month with the principal portion of his payment. If he starts at month 61, the payment will include $835 for principal and $684 for interest. So if John makes half the payment, he gets $417.50 in equity -- half the principal portion.
The interest portion of his payment doesn't count. In effect, John has taken on responsibility for paying off half of the remaining debt, and he pays interest rather than having to pay the whole amount at once.
Every month John makes a payment he and Jane can refer to the amortization schedule to see the additional equity each has built. The same approach could be used if, say, John paid only a third of the mortgage; he'd get a third of the equity acquired each month.
The final step is figuring how to divide any new equity created by growth in the home's value after John comes on board.
Jane's equity up to this point has already been figured, based on her down payment, the home's appreciation and the payments she made on her own. Equity acquired after John arrives could be divided according to the shares of future mortgage payments. If John pays half he'd be entitled to half of the new equity acquired during the time he kicked in.
In other words, if the home, valued at $250,000 when John moved in, sold a few years later for $300,000, John would be entitled to half the $50,000 because he'd shouldered half the payments during those years.
Jane, of course, might feel that since she had more money tied up in the house when John arrived she should get a bigger share of the future gain in the home's value. On the other hand, she did profit from this investment through the home's appreciation before John joined in. It's a debatable point, one that should be ironed out before the arrangement begins.
Note that these calculations don't account for the escrow payments for homeowners insurance and property taxes. Those have nothing to do with the equity in the home. They are like the water, electric and food bills, to be divided any way the couple wants.
Any expense that's not evenly shared can become a bone of contention if the couple has a falling out. So whatever you settle on, best get a lawyer to make it official.