Risks of buying out ‘underwater’ partner

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Q: I am trying to figure out what path to take regarding a duplex I purchased jointly with a friend in 2006. It has been a great place for us to live, but I have since gotten into a relationship and plan to move in with my boyfriend. My housemate/co-owner also would prefer to move in with her new partner, so the property no longer works for either of our life needs. Even though we put 20 percent down, we are seriously underwater on the mortgage, as the property has lost about 50 percent of its equity over the last few years. Our loan was fixed for only five years, so the interest rate adjusts next year and the second mortgage comes due then, too. My co-owner would like to keep the property as an investment and has offered to buy me out, including a lump sum to pay me back the 20 percent I put down. She also applied to the bank to assume the loan and have me removed from it, but that was rejected. Can you give us some information about our options -- i.e., short sale, fo...