A partial release of a mortgage is a method of splitting up a piece of property that is currently under a mortgage lien. The request is that the bank officially remove the lien from part of the property, while retaining the lien that secures the remaining mortgage on the rest of the property.
People find a partial release of a mortgage to be helpful for several reasons, including if they choose to sell part of their land to someone else, if they want to be able to grant full right-of-way to a utility company, or if they need part of their property to have clear title for another reason. Not everyone qualifies for a partial release, however, so it’s key to understand the conditions that could make one possible.
Definition and Examples of Partial Release of a Mortgage
A partial release of a mortgage is a way to sell a portion of a property that, as a whole, is still under a mortgage lien. A partial release of a mortgage is an arrangement you make with your mortgage lender after you’ve been paying your mortgage for at least 12 months. Typically, a partial release of a mortgage involves delineating which part of the property is still under a lien, and which part has clear title to be sold.
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.
An LTV ratio compares the amount of a loan you're hoping to borrow against the appraised value of the property you want to buy.
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.
Partial releases of mortgages are not guaranteed for all mortgage loans, and some loans will have stipulations about when they are and are not eligible for partial release. For example, if you have a government-secured loan such as an FHA Loan, there will be additional requirements. FHA approval is required for certain fairly impactful partial releases, such as a partial release of more than 10% of the mortgaged property.
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.
The total cost of fees for a partial release of a mortgage will depend on the lender. Greeneville, South Carolina-based Shellpoint Mortgage Servicing, for example, charges a processing and approval fee of $250, an appraisal fee of about $1,200, and a principal deduction fee, which will depend on your risk level. Depending on your situation, there may be other fees required by lenders, so it’s best to consult with a title agent or real estate attorney to decide if a partial release is worth it.
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.
- A partial release of a mortgage involves dividing a property so that part of the property no longer is connected to the obligation of the mortgage loan.
- Obtaining a partial release when you’ve paid down a substantial portion of your mortgage can allow you to sell off part of the property free and clear.
- Partial releases are also needed to maintain an accurate chain of title, showing when changes such as easements and boundary adjustments changed the rights of use for a property.
- A partial release of a mortgage has certain requirements to meet and can cost an individual thousands of dollars in fees, so it may not be the best option for everyone.