What is an Owelty?
The actual definition of an Owelty is: the amount paid or secured by one owner to another to equalize a partition of property in kind, or a payment made to achieve equality between those who exchange property.
How is the Owelty used in traditional lending during divorce and other situations?
Owelty and Divorce
During a divorce when there is a primary residence held in common law, like it is in Texas, and there is equity in the home, the owelty is an “instrument” used to break in half or break into two agreed fair parts, the equity in that home. In this example, the person/spouse leaving the home is usually awarded a portion of the equity in that home through an owelty deed after this split of equity is mentioned in the divorce decree. You can look at the owelty as a lien on the property, but instead of the lien holder being a bank, the lien holder in this case is the spouse being rewarded the equity in cash. So, upon refinancing, the spouse keeping the home can use his new refinance loan to pay off whatever current loan is on the property, and the spouses portion of equity tied to the owelty.
Owelty and Family Trust
The other way the Owelty is often used in traditional lending is when there is a family trust and say one cibling is going to keep a property awarded by the trust, but maybe there are multiple ciblings on the trust receiving the property and the others do not intend to keep the property but want their portion awarded to them by the trust. In this case, the siblings NOT keeping the property can use oweltys to get their said portion of equity from the property. From that point, it works the same way as refinancing the owelty during a divorce situation.
To sum it up, and to be clear, the owelty does not have to be paid off through refinancing of a home. The owelty can be cleared and repayed in cash just as well.