Removing Co-Signers From a Loan

Did you purchase a home with a co-signer? Co-signing is a generous action that allows many people to buy a home even though they have difficult financial circumstances. But once you and your co-signer are joined, can you separate from the co-signer? Should you act to remove them at some point? And if so, how? Here are some answers to these questions.

Why Should You Remove a Co-Signer?

After taking on a mortgage with a co-signer, you aren't obligated to remove them for the life of the loan. If you and they would like to continue the arrangement, you may do so. However, many borrowers eventually decide to take this step once their finances or credit history improves to the point where they can get a good mortgage loan on their own. Doing so is a sign of independence and financial stability.

Removing the co-signer when possible also protects them. Because a co-signer is required to make payments if you're unable to, they are at financial risk if something drastic happens to you. In addition, the co-signed loan often shows up as a debt obligation for them, hindering or raising the cost of their own credit access as well.

Do You Need to Involve the Co-Signer?

If you've reached a point where you would like to remove your co-signer, you don't need to involve them in the process. The co-signer is a passive participant in the loan, not an active one. They can't block you from most actions, including taking out a new loan to remove them as co-signer. It's seamless to them and you can give them notice either before or after.

How Do You Remove a Co-Signer?

To remove a co-signer, you would first check your mortgage contract to see if it has a clause allowing the release of the co-signer. This may be possible if certain pre-set conditions have been met.

If the contract doesn't provide for release, you may pay off the shared loan through mortgage refinancing. With refinancing, the borrower seeks out a new mortgage loan — in their name only — for the same amount (or more) as they currently owe on the original mortgage. You would then use this money to pay off the original mortgage and close it out.

Of course, you can also remove a co-signer by selling the property being mortgaged. Paying off the mortgage one way or the other releases the co-signer of their obligation by ending the loan.  

Are There Other Advantages to Removing a Co-Signer?

When you take the step of refinancing to release the co-signer, you have a great opportunity to change the terms of your loan. Many people who took out a loan when they needed a co-signer may not have qualified for the best interest rate or may not have been able to afford a large payment. If your finances are in better shape, you could refinance at a lower rate or even reduce the length of your loan to save money.

You might also consider a cash-out refinance if there is equity in your home. With this type of refinance, you take out a mortgage for more than you owe and use the difference for other purposes, such as paying off a student loan, fixing up the home, or paying off old debt.

Where Can You Learn More About Co-Signers?

Learn more about all your mortgage options by meeting with a quality home lender today. Cornerstone Residential Mortgage can help. We offer a variety of mortgage products for borrowers of all types and budgets. Call today to speak with a mortgage specialist and start on your journey toward true financial independence from your co-signer.