Mortgages inherently deal with death. The word “mortgage” comes 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 your death pledge outlives you? Who pays your mortgage when you die?
Your lender can foreclose on your home if it doesn’t continue receiving regular payments after you pass away, says Sara Hire, a San Jose-based lawyer who specializes in estate planning. To prevent that, you should make a plan that would pass your home down to your heirs instead. Depending on your circumstances, that may involve having a co-borrower, or purchasing insurance to help 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 responsible for mortgage payments after you die?
If you and your spouse took out the mortgage together, that co-borrower would be responsible for taking over the payments and would be the legal owner, free to live in the house, refinance the loan or sell it. If he or she isn’t on the loan — for instance, due to credit problems — talk to an attorney about your spouse’s rights; inheritance laws vary from state to state.
If you don’t have a co-borrower but you have a co-signer, that person would have to step up. Wells Fargo spokesman Tom Goyda says it’s smart for anyone 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 easier for anyone who inherits a home to get on the mortgage and qualify to make payments. Federal law also prohibits lenders from requiring the loan to be paid in full whenever a mortgage transfers to someone else. (Note that if you also have a home equity loan, lenders could require its payment in full.)
In the absence of a spouse or a co-signer, you should designate a beneficiary. Once the title has passed to that person, she can refinance the loan if she wants to hold onto the property.
Consider adding some insurance
If the person you leave the house to would have a hard time making the payments without you, you might want to buy insurance to help them with that expense. Hire says that a life insurance policy is often 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 lender would receive a check to pay off whatever remained on the mortgage. The downside is that the value of the policy decreases every year, because it will only pay whatever you still owe on the loan. And the money goes directly to the mortgage lender, not to your heirs.
For most people, Hire recommends life insurance as the better option. The value of the policy remains the same regardless of what’s owed on the mortgage. And the payout goes directly to your beneficiaries, allowing for more flexibility. They can use it to make mortgage payments if that’s what’s best 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 importance of making such a plan. It appears that he didn’t leave a will or trust, and now multiple relatives are making claims on his estate, forcing the courts to get involved, which will likely be a lengthy and expensive process.
When you own property, drawing up a will or creating a trust is perhaps the best way to make things easy for your loved ones, says Sacramento-based attorney John Palley.
Most people will find that a will is cheaper and provides sufficient protection. But for others — particularly those with high-net-worth estates, or who live in states with high probate fees — a trust is worth the extra cost and effort. Make sure that the people who would have to carry out your wishes would know how to find the mortgage and other documentation if you were no longer around.
A will or a trust should guarantee that your house passes to your heirs as quickly as possible. Without one, the state will take over and designate heirs for you, or the bank may foreclose.
Also, as long as they were not designated as beneficiaries, your relatives would not be responsible for taking over your mortgage payments, even if they were living in the house at the time of your death.
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