What Happens To Mortgage When You Die?

What Happens To Mortgage When You Die? Understanding what happens to your debt when you die is an important part of estate planning—and you don’t have to be rich to have an estate. Everything you own and owe makes up your estate. For many people, that includes a house with a mortgage.

What Happens To Mortgage When You Die?

The median housing-related debt of a 65- to 74-year-old borrower with a first mortgage, home equity loan, and/or home equity line of credit was $100,000, according to the U.S. Census Bureau’s American Housing Survey in 2019, the latest results available. For homeowners 75 years and older, it was $75,000.

State and federal laws determine what happens to the house and the mortgage when the owner dies. The owner also has a say, as long as they do some basic estate planning—like creating a will or trust, designating beneficiaries and possibly buying a life insurance policy.

Your Debt Doesn’t Die With You. Here’s Why.

When you die, all your liabilities and assets—including your house—become part of your estate, which someone then has to settle. An important part of this process is taking inventory of everything you own, and figuring out who gets what among heirs and creditors ahead of time.

If you have a will, then you’ve already chosen an executor to handle this task. If you die without a will or trust, then your state’s probate court will appoint someone to settle your estate: typically a spouse, an adult child, or a closest relative.

What Happens to a Mortgage Once the Home Transfers to an Heir?

If your will names an heir to your home, that person will not have to take over your mortgage, as long as they are not co-borrowers or co-signers on your loan. However, federal law does allow your heirs to take over the mortgage.

If you leave your mortgaged home to your daughter, for example, the mortgage servicer must honor her request to become the new mortgagee (the borrower). She does not have to qualify and demonstrate an ability to repay the loan. This rule covering the assumption of a mortgage also applies after the death of a spouse, though many spouses are often co-borrowers on a mortgage and co-owners of a home already.

Helping Heirs Afford the Mortgage

The lender will still be able to foreclose if the assumed heir stops making payments. You may need to provide a way for the heir to afford not just the mortgage payments, but also the upkeep, property taxes and homeowners insurance. If the home belongs to an association, staying current on homeowners association (HOA) payments is also imperative.

You can provide these funds by leaving your heir other assets (such as the cash in a payable-on-death savings account) or by naming them as a beneficiary on a life insurance policy. You could also consider funding a trust with life insurance.

What Happens to a House When the Owner Dies With Other Debt?

If you die with other debts that can’t be repaid from your estate, state law may require the executor to sell your house to help repay those debts. If the proceeds from selling the home exceed the debts owed, then whoever was chosen to inherit your house will get the excess.

Again, life insurance can help here. It can repay your debts at death so your heir can inherit your home.

Remember, your estate does not have to pay off your mortgage. Since your mortgage is secured by your home, the mortgage servicer can foreclose and sell the home to get back the money owed.

What Happens to a Joint Mortgage When Someone Dies?

When one borrower on a joint mortgage dies, the surviving borrower becomes fully responsible for the mortgage. In most cases, a joint borrower is also a joint owner who will become the sole owner. This will be the case when the home is titled in joint tenancy, tenancy by the entirety or community property with the right of survivorship.

What to Do as Heir of a Home With a Mortgage

If you’re an heir or an executor of an estate (or both), you’ll need to deal with the house and the mortgage when the homeowner dies.

Keep Making Mortgage Payments

It usually takes several months to wrap up someone’s affairs after they die. If you don’t want the home to fall into foreclosure while the estate is being settled, it’s important to keep making mortgage payments. These payments might come from the estate, or from an account that the deceased designated as payable on death to the heir. Payments could also come from life insurance proceeds.

Pay Off the Mortgage

Paying off the mortgage after the owner dies isn’t a decision to rush into. A mortgage is usually a low-interest loan, and the estate’s other assets or the proceeds of a life insurance policy may be better put to other uses. Some people buy mortgage protection insurance to pay off the loan when they die, but experts usually say premium dollars are better spent on conventional life insurance.

Refinance the Mortgage

An heir who cannot afford the mortgage but wants to keep the home may be able to refinance into a lower monthly payment. Here are some possibilities:

  • Ask the mortgage servicer for a loan modification
  • Refinance into a longer-term loan
  • Refinance into a lower rate

Why Estate Planning Is Important

Estate planning lets you leave your assets to the people you want to have them. It also allows your heirs to avoid headaches such as figuring out what will happen to a mortgage or house when you die. Estate planning can keep your assets out of probate, too, making it easier, faster and less expensive for your executor to settle your affairs.

Finally, estate planning that includes medical and financial powers of attorney, a living trust and an advance health care directive makes it possible for people you trust to manage your affairs if you become incapacitated.

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