What Happens to my Mortgage When I Die?
While you might not think of it when purchasing a home, you should understand what happens to your mortgage when you die. This is a vital step to preparing your families future.
If you pass away before paying off your mortgage the bank has several ways to recoup their investment. Lucky for you, your family has a number of choices as well.
As you work through estate planning, take all of your debts, but particularly your mortgage, seriously (as it will likely be among your largest debts). If you’re a beneficiary, you'll want to know how mortgages work, too. We'll explain the basics of what goes on.
Alfred's Tip: Are you the executor of a will or trustee for a deceased loved one's estate? This can be an overwhelming time. We've got you covered with our user friendly and robust planning tool. To get free access to our tool, click here.
Who is Responsible for Paying Off the Mortgage?
If you purchased the home with another person (i.e. spouse, cosigner) the debt will likely pass to that person. The person who inherits the property (i.e. children, grandchildren) may also take over the mortgage.
If there are sufficient assets in the estate, you could liquidate those assets to pay off the mortgage completely, or help cover some payments while you make a final decision.
If there is no way to meet your monthly payments, the bank will foreclose on the home. It will be as if the owner was living and simply stopped making payments.
The redeeming quality of mortgage debt is that a foreclosure settles the debt because it acts as the collateral. Other debts may have no collateral, making them less simple to settle. That said, you will likely have options before resorting to foreclosure.
A home is a very important part of a person's legacy. Thus, foreclosing is likely to be a last resort. So, what choices do you have for handling an outstanding mortgage?
How to Pay Off an Inherited Mortgage
If you inherited a mortgage, you might be wondering how in the world you are going to make the payments. Use one of these methods to help you manage the payments (or the entire mortgage).
Paying off the house out of the estate
When settling an estate, the executor will look at the total assets and debts a person has at the time. Assuming assets outweigh debts, the executor can decide to pay off the mortgage.
Much of this will depend on the beneficiaries. If there are multiple, some heirs may push back on paying off the mortgage and opt to sell. Navigating these events can be quite tricky with many differing opinions. Get ahead of the family tension by organizing your wishes ahead of time using our end of life planning tool.
Selling the house
There is a chance that nobody in the family needs or wants to keep the house. In this case, selling it will liquidate the asset and cover the mortgage. Should you take this path, you will need to stay current on payments to keep the home out of foreclosure. If you need help selling a home, let us know here, and we will connect you with our recommended realtor in your area.
Taking over the mortgage
Let's imagine a spouse passed on, or a child wants to live in the home. In this situation they can take over the mortgage. If the mortgage is more expensive than you could normally qualify for you can use the Consumer Financial Protection Bureau (CFPB) rules to protect you. As an heir, you can take over the mortgage without an ability-to-repay evaluation. If you can't afford the monthly payments, then it doesn't make sense to live outside your means for long. You may see a benefit in holding on to the house for a certain amount of time to sell at the best price for your situation, but timing the market can be tricky. If you have someone in the family with real estate experience, lean on their insight. If not, you can easily find real estate experts in your area. (Let us know here if you want an intro to a great realtor.)
Refinancing a mortgage is also an option if the current payment is just too much. Refinancing can can extend the term of the loan and (sometimes) reduce your monthly payment. Especially if interest rates are more favorable now than when the mortgage was originated.
Pay off the reverse mortgage (Less common)
If a person is older than 62, they can borrow against the equity of their home. This essentially creates loan with the house as collateral. Seniors may take out a reverse mortgage to pay expenses or to increase cash flow during retirement. Be aware that the total loan amount grows as you borrow more and interest accrues. When a home has a reverse mortgage and the owner dies, you may need to sell it just to pay off the debt and there might not be much equity in the home.
So What Should You Do?
For most Americans, their home is their largest asset. Additionally, homes carry sentimental value and families may want to keep it in the family. As a homeowner, you can help prepare your loved ones for the need to assume a mortgage after your death. You can take out life insurance policies to cover payments or even to pay off the mortgage.
Need help finding a life insurance policy? We can help with that - and you won't have to talk to a single person! Check out Ethos Life Insurance for simple, effective insurance solutions.
Be aware of the impact of reverse mortgages on your estate. In the vast majority of situations, families find a way to manage a leftover mortgage. But try your best to prepare a way for your loved ones to manage.
If you've figured out your debts and assets and how they work after you die, you may be ready to take the next step and get a will. If you'd like to meet with an estate planning attorney, we're happy to connect you with one of our recommended professionals in your area. We have a strong network of estate planning attorneys across the US and can connect you with a great attorney. Fill out this form to get connected.