"My family is looking to buy a two family house for $200,000 with another family.  We have no cash but the other family will put 20%  ($40,000) down for both of us.  How do we divide up the mortgage payment and the ownership shares?" 

There are two fair ways to structure the deal.  The first method assumes you are equal partners in owning the house -- both of you own 50%.  Property taxes and maintenance costs are shared 50-50.  However, you financed a larger part of your purchase than the other family.  Your share of the mortgage is $100,000 while your friend's share is only $60,000.

In this arrangement, you pay 5/8 of the mortgage payment (100 divided by 160) and family two pays 3/8.  If you sell the house before the loan is paid off, you receive 1/2 the sale price less 5/8 of the remaining loan balance, while family two receives 1/2 the price less 3/8 of the balance.

The potential drawback of this arrangement is that you might not be able to afford 5/8 of the mortgage payment.  In that event, you might opt for an alternative arrangement that assumes that your friend’s $40,000 is used to acquire more of the house rather than a smaller part of the loan. 

In this arrangement, your friend owns 3/5 of the house -- 120 divided by 200 -- and you own 2/5. Your friend must also pay 3/5 of the taxes and maintenance.  The mortgage payment, however, is split 50/50.  If the house is sold before the loan is repaid, your friend gets 3/5 of the equity (sale price less loan balance) and you get 2/5.

Both of these arrangements are good for you because your friend’s down payment reduces mortgage costs for both parties.  If you were on your own, you would pay either for mortgage insurance or a significantly higher interest rate.  Don’t be too surprised if your friend suggests, as compensation for reducing your costs, that you pay a little more than 5/8 of the mortgage payment in arrangement one, or accept a little less than 2/5 of the equity in arrangement two.

Copyright Jack Guttentag 2007