Mortgages inherently contend with death. The word “mortgage” originates from the Old French for “death pledge,” meaning that the loan expires after being paid in full; if it’s not paid, the property is taken and is “dead” to the owner. But what if the death pledge outlives you? Who pays your mortgage whenever you pass away? Your lender can foreclose on your property when it doesn’t continue receiving regular payments after you pass away, says Sara Hire, a San Jose-based lawyer who specializes in estate planning. In order to avoid that, you should come up with a plan that would pass your home down to your heirs instead. Depending on your situation, that could involve using a co-borrower, or purchasing insurance to assist someone carry the payments after you’re gone. It should definitely include making your wishes clear and legally binding with a will or trust.
Who’s liable for mortgage payments whenever you die?
If you and your spouse acquired the mortgage together, that co-borrower will be liable for taking on the payments and would be the legal owner, able to live in the house, refinance the loan or sell it. If he or she isn’t on the loan – for instance, because of credit problems – talk to an attorney about your spouse’s rights; inheritance laws differ from state to state.
In the event you don’t have a co-borrower however, you have a co-signer, that individual will have to step up. Wells Fargo spokesman Tom Goyda says it’s smart for anybody who takes over payment responsibilities to notify the lender rather than simply sending in checks. This can prevent miscommunication and allow your heirs to assess all payment options.
As of 2014, a Consumer Financial Protection Bureau rule makes it much easier for anybody who inherits a house to get on the mortgage and qualify to make payments. Federal law also prohibits lenders from requiring the loan to be paid completely whenever a mortgage transfers to someone else. (Keep in mind that if you also have a home equity loan, lenders could require its payment completely.)
In the absence of a spouse or a co-signer, you should designate a beneficiary. After the title has passed to that person, she can refinance the borrowed funds if she wants to hold onto the property.
Think about adding some insurance
If the person you leave your house to could have a hard time making the payments without you, you might want to buy insurance to help them with this expense. Hire states that a life insurance policy is commonly recommended if you have dependent children, or if your beneficiaries don’t have much money.
One option would be mortgage life insurance, also known as mortgage protection insurance, or MPI. If you died, the financial institution would be given a check to pay off whatever remained on the mortgage. The downside is that the value of the policy decreases every year, since it is only going to pay anything you still owe on the loan. And the money goes straight to the mortgage lender, not to your heirs.
For most people, Hire recommends life insurance as being the better option. The value of the insurance policy stays the same in spite of what’s owed on the mortgage. And the payout goes straight to your beneficiaries, allowing for more flexibility. They are able to use it to make mortgage payments if that’s what’s suitable for them, or they can put the insurance money to other needs.
Put your wishes in writing
The recent death of the musician Prince shows the significance of making such a plan. It appears that he didn’t leave a will or trust, and after this multiple relatives are making claims on his estate, forcing the courts to get involved, which will likely be a prolonged and expensive process.
When you own property, creating a will or setting up a trust is perhaps the best way to make things simple for the ones you love, says Sacramento-based attorney John Palley.
Most people will find that a will is less expensive and provides sufficient protection. But for others – especially those with high-net-worth estates, or who reside in states with higher probate fees – a trust is definitely worth the additional cost and effort. Make sure that those who would have to carry out your wishes would know how to find the mortgage along with other documentation if you were no longer around.
A will or a trust should ensure that your house passes to your heirs as soon as possible. Without one, the state will take over and designate heirs for you, or even the bank may foreclose.
Also, provided they were not designated as beneficiaries, your relatives will not be liable for taking on your mortgage payments, even if they were living in the house at the time of your death.
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