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Home ownership is a significant milestone for many Americans, one that brings pride and responsibility. The pride comes from realizing that your hard work has allowed you to put a roof over your family’s heads. The responsibility comes in doing everything it takes to maintain that, including after your final night has arrived.
Owning a home is also a central pathway to achieving the American Dream. As recently as 2022, about 66% of Americans owned homes according to the US Census Bureau. But many of these homes still had mortgage debt. In the Q1 2024 Quarterly Report on Household Debt and Credit, the Federal Reserve Bank of New York reported that Americans owed a staggering $12.44 trillion in mortgage debt at the end of March 2024. And a 2017 Credit.com survey found that 37% of Americans died with unpaid mortgages. So, while many Americans deeply value home ownership, it’s also true that many Americans will pass away with a balance remaining on their mortgage.
Because of the unique value of a house within the pool of assets you intend to leave to your loved ones, a house often plays a starring role in estate planning. For many, a house is the most significant asset in their estate. One common question, then, that arises when working with estate planning clients is: “What happens to my mortgage when I die?”. Although many homeowners might not want to think about this question, understanding what happens to mortgages after death helps ensure that your loved ones aren’t caught off guard and that your executor can manage your estate in accordance with your wishes without the added burden of unexpected debt.
In this blog post, we discuss what happens to your mortgage when you pass away, and provide guidance on how to incorporate planning for this event into your estate plan.
A mortgage is a loan secured by real estate property, and is typically used to purchase a home. You, the borrower, agree to repay the lender over time, usually in monthly installments that include both principal and interest. The house is collateral, meaning the lender can take possession if you fail to make payments.
When you take out a mortgage, you commit to repaying the loan over a set period, often 15 to 30 years. Your monthly payment includes the loan’s principal and interest, and it may also include property taxes and homeowners insurance. Each payment reduces the principal on your loan balance, which in turn allows you to build home equity.
As with any legal agreement you enter into, it is imperative to take the time to understand the key terms and conditions of your mortgage. This includes terms like the interest rate, repayment schedule, and any penalties for early repayment. Knowing these details can help you make informed decisions about your mortgage, including what happens to it when you die.
In general, debt can be either secured or unsecured. Like certain other debts you may hold when the night comes, mortgage debt does not simply disappear when you die. A mortgage loan is one form of secured debt, and creditors can pursue collection on such debt when the debt holder passes away by repossessing the collateral. While title to a house can transfer to a designated party(-ies) after your death, any outstanding balance on the property also gets transferred. Your mortgage lender retains a legal right of ownership over the house until the mortgage debt has been satisfied.
More Americans now expect to receive an inheritance. At the same time, a 2016 Experian report indicated that about 73% of Americans are likely to die with some form of debt, including mortgages. Furthermore, a 2023 Charles Schwab survey found that while over three-quarters of parents plan to leave their homes to their children, nearly 70% of these potential heirs expect to sell the property due to rising real estate costs. There is a tension at play here. A difference exists between valuing a house as an asset and valuing a house as a family home. And this difference matters when it comes to estate planning.
When deciding the fate of an inherited family home, the decision is often not purely financial. Many individuals have a deep sentimental attachment to their family home, filled with memories and history. However, the reality of maintaining or affording such a property can lead beneficiaries to consider selling it. Whether or not the estate has sufficient resources to pay off any mortgage balance and what may be left after doing so may shift a decision in one direction or another. That’s part of why it’s important to understand the options for what happens to your mortgage when you die, and to use that knowledge to make an informed decision when planning your estate.
Inheriting a property subject to a mortgage can be complex, especially when dealing with different types of loans and the borrower’s status. Here are three common scenarios that estate planning attorneys can advise on:
A person can leave a house to a loved one after death through various legal mechanisms such as a Will, a Trust, or a deed (whether a jointly titled deed with rights or survivorship or some other similar means of transferring property by operation of law). In Ohio, for example, a Transfer on Death (TOD) Designation Affidavit allows property owners to name a beneficiary who will inherit the property upon their death. These affidavits enable real property to bypass probate and transfer directly to a beneficiary.
Remember: any mortgage or loan secured by the home also transfers when the home transfers. A mortgage servicer plays a crucial role in making decisions about the property and dealing with payments when a house is inherited. They can provide guidance on assuming the mortgage, refinancing, or other alternatives.
What options does the person inheriting the house have to consider?
When multiple beneficiaries inherit a property, the situation becomes more complex. They have similar options to a single beneficiary, but all decisions require mutual agreement. Their options include:
FHA loans, along with conventional loans, VA Interest Rate Reduction Refinance Loans (IRRRL), and jumbo loans, may be involved in the inheritance process.
In some cases, one or more beneficiaries might choose to buy out the shares of the other beneficiaries. However, this option has become increasingly challenging in recent years due to rising home prices and mortgage rates. It may be financially impractical for one or a few beneficiaries to take on the entire property value.
If the beneficiaries cannot reach a consensus on how to handle the inherited property, the court may intervene. In such cases, the court might order the sale of the property and oversee the division of the proceeds among the beneficiaries.
The scenarios discussed above assume that the original homeowner had an estate plan in place, including a Will or Trust. However, this is not always the case. In fact, approximately two-thirds of Americans do not have an estate plan.
When someone dies without a Will or Trust (known as dying “intestate”), the court steps in to manage the distribution of the deceased person’s assets. This process is called probate. In these cases, the court appoints an executor or personal representative. This person is responsible for distributing the decedent’s money and property and settling their debts.
Because the home is part of the unsettled probate estate, any mortgage on the home also becomes part of the probate estate. The executor has the authority to use other money and property from the probate estate to make mortgage payments until the home is either sold or transferred to the rightful heir as determined by state intestacy laws.
In Ohio, creditors can claim debts against an estate, including mortgages, within six months after the date of death. This provision ensures that mortgage lenders can still recover their money even if the borrower passes away. If the mortgage isn’t paid during probate, the heir will take over the home with the existing mortgage, facing the same options of paying off the mortgage, selling the property, assuming the mortgage, or potentially refinancing.
Estate planning is about so much more than just drafting documents. A qualified, experienced estate planning attorney can help you prepare holistically for the possibility of your final night coming before your mortgage has been paid off. Here are some considerations to keep in mind:
Mortgage life insurance pays off the remaining balance if the insured borrower dies. While this can ease financial burdens on your family, a financial professional should review the terms and conditions to ensure adequate coverage.
Foreclosure is a risk when mortgage payments stop for a period of time after your death. If you have an underwater mortgage, you and your heirs and beneficiaries may elect to do nothing with the house after your death. After a period of time with no payments, the lender will initiate foreclosure. An estate planning attorney who understands real estate law can be especially helpful to you in this analysis.
However, if you want to keep the property in the family, then you need to protect against the risk of foreclosure. To mitigate this, consider setting up a Trust. Placing your property in a trust can provide a smooth transition of ownership and management, ensuring that mortgage payments continue uninterrupted. Alternatively, consider purchasing mortgage life insurance. These steps provide financial resources to cover the mortgage, preventing foreclosure and loss of the family home.
Discuss your mortgage and your wishes for the property with your heirs. Clear communication can help them understand their options and prepare for the future.
If you have co-signers or co-borrowers on your mortgage, they are equally responsible for the debt. This means they must continue making payments after your death. Discussing these responsibilities with them beforehand ensures everyone is prepared for this possibility.
If your beneficiaries can’t or don’t want to maintain mortgage payments, selling the property is another option. The sale proceeds can pay off the remaining mortgage balance, with any leftover funds distributed according to your Will or Trust. This process ensures that the debt doesn’t burden your loved ones long-term.
Understanding what happens to your mortgage when you die is an important part of estate planning. By taking proactive steps and communicating with your loved ones, you can ensure that there is a plan to address any mortgage debt remaining at the time of your passing, and that your property is either preserved or sold according to your wishes.
If you are an Ohio resident with questions about estate planning in general or specifically interested in discussing “what happens to my mortgage when I die?”, contact Rhodium Law today to schedule a free consultation. We proudly offer estate planning services in Cleveland, Ohio, and are here to guide you through the process of creating a comprehensive plan that protects your assets and provides peace of mind for you and your family. Plan today | Peace tomorrow.
