Estate plans usually concern who will get what, like money, jewelry, the house, and family heirlooms after a person dies. Little thought, though, is given to what will happen to debts when they die and what happens to a mortgage after you pass away?
Many people expect to pay off their mortgage long before they pass away, but the current financial landscape paints a much different picture. As seniors live longer and longer, they are often forced to take out second mortgages and home equity loans to cover the cost of basic living expenses. So what happens to that mortgage after they die?
The Simple Answer
The simple answer is that the mortgage stays with the property, which means that it becomes the responsibility of whoever inherits the property. Complications may arise when the time comes to determine how the mortgage will be paid off. Here’s what you can expect to happen if you have a mortgage on your house at the time you pass away:
The money from your estate is used to pay the mortgage. Paying off the mortgage through the estate is the best option, but it only occurs through careful legal and financial planning. The estate must have enough assets to cover the debt, which may leave your beneficiaries with less cash but also a house that is owned outright. In order for this to happen, you should make a provision in your Last Will and Testament, Revocable Trust or Irrevocable Trust to have the mortgage paid with estate or trust assets. This is also a great opportunity to integrate life insurance planning. It is recommended that you consult with an experienced Orange County trust lawyer to see if this option is a possibility for you.
Your beneficiaries pay the mortgage. Another, more complicated, route is having your beneficiaries pay the mortgage. In some cases, your beneficiaries could refinance to get a better interest rate on the mortgage. However, if they already have a mortgage on their own home, they could be forced to sell either their home or the inherited home to pay off the mortgage.
Sometimes, though, the property is worth less than the value of the mortgage. A lender could agree to a short sale, which means the home would be sold for less than the value of the debt, but the estate would not be held liable for the difference or loss.
It is important to review your current situation with an experienced Orange County trust and estate lawyer before you make any decisions concerning your estate plan. If you have any questions about the role your mortgage can play in your estate plan, please contact us to set up an initial consultation.
If you Need Help, It Would Be Our Pleasure…
Kevin Snyder is a husband, father, and an Orange County estate planning attorney and elder law attorney at Snyder Law, PC in Irvine, California. He’s all about family and passionate about estate planning, elder law, and veterans. He founded Snyder Law to help people be prepared and have the peace of mind they are protecting their families and aging parents for when life happens.