When you have a mortgage on your house that you won’t pay off any time soon, you need to factor that debt into your estate plan. A mortgage is a significant debt that can affect the value of your total estate, diminish inheritances that you leave, and burden co-owners with payments.
What Happens to a Mortgage When the Homeowner Dies?
Mortgages do not disappear when the homeowners die. Instead, the mortgage companies may seek repayment of the mortgage debt from the homeowners’ estates or even change the mortgages’ terms for the surviving co-owners.
When only one person took out the mortgage, the mortgage company can make a claim against the deceased person’s estate. Estate executors must notify all creditors and allow them time to file claims. Before the deceased person’s assets can be distributed to heirs, the creditors who made claims get paid from the assets. This diminishes the inheritances that heirs receive. If the deceased person’s assets are not enough to pay all creditors, each creditor gets some of the assets. Then the heirs inherit nothing.
A mortgage is often the largest debt that the estate must pay. If it is large enough, paying it back can wipe out all of the assets – including the house itself. The executor might have to sell the house or give it up to the mortgage company.
What If More Than One Person Owns the House?
When there are two or more homeowners, the mortgage is probably in both people’s names. As a result, the surviving homeowner usually becomes liable for paying the mortgage when one homeowner dies. In some cases, it might be an opportunity to refinance, or the mortgage company might try to make changes in the mortgage terms. In other cases, it is a financial disaster because the surviving homeowner can no longer afford mortgage payments.
Estate Planning Around a Mortgage
Some people choose to have their houses owned by trusts to avoid the issues described above. However, it might be difficult to get a mortgage or change the owner on a mortgage if you start a trust (talk to a lawyer and your mortgage company for details). There are some other options like having the home owned by a business, choosing ownership by only one spouse, or even provisions in a will requiring sale of the house upon the homeowner’s death. Again, talk to your estate planning lawyer about what is best for you, especially if you are retiring and still owe years of mortgage payments.
In debt and want to start planning your estate? Local attorney Andrew Szocka, Esq. provides thorough and speedy estate planning help in the Chicagoland area. To schedule a free initial consultation, visit the Law Office of Andrew Szocka, P.C. online or call the office at (815) 455-8430.