When setting up an estate plan, most people are concerned with what will happen to their belongings: money, jewelry, house, among other things. However, most people give little thought to what will happen to their debts when they pass away, notably their mortgage.
For years, many people expected to pay off their mortgage long before they died, but the current financial landscape paints a much different picture, especially since more and more seniors take out mortgages and home equity loans to cover cost of living expenses. An analysis of data from 2001 – 2011 showed the number of homeowners aged 65 and over who held a mortgage increased from 22 percent to 30 percent, while homeowners aged 75 and over who held a mortgage more than doubled from 8.4 percent to 21.2 percent. These startling figures may prompt people to ask themselves, “What happens to my mortgage if I die?”
The simple answer to that question is that after you die, the mortgage belongs to whoever inherits your house. The complications arise when it comes time to determine how the mortgage will be paid off. Below are some common scenarios that estate planning attorneys have seen when a person dies while holding a mortgage.
Your estate pays off the mortgage. This option may be the most desirable situation, though it can only occur through careful legal and financial planning. For the estate to pay off the mortgage, the estate must, of course, have enough assets to cover the debt. This scenario may leave your beneficiaries with fewer cash distributions, but they will own the house free and clear. It is possible to make a provision in your Last Will or Trust to have the mortgage paid through estate or trust assets, but it is recommended that you consult with an estate planning attorney to determine what your situation is and how to best address it.
Your beneficiaries pay off the mortgage. Of course, beneficiaries may already have mortgages of their own, so this could lead to some complications. If the recipients are willing and able, they may take over the monthly mortgage payments for your house. In this case, your beneficiaries could refinance to get a better interest rate on the mortgage. If your beneficiaries already own a home and have a mortgage, they could sell either their home or the inherited home to pay off part or all of the respective mortgages.
If the property is worth less than the value of the mortgage, your beneficiaries can confer with the lender to see if a short sale is possible. If the lender agrees to a short sale, the home will sell for less than the value of the debt, but the estate would not be held liable for the difference or loss. You can discuss these possibilities with an estate planning lawyer to determine what may be the best course of action to take.
It is important to review both assets and debts with your estate planning attorney when forming your estate plan. Please contact Estrada Law at 556-2462 to set up a consultation so we may review your estate planning options, or visit our website at EstradaLawPC.com and sign up for one of our upcoming no cost no obligation estate planning workshops.