Dying with a mortgage on your house has the potential to cause trouble for your heirs. For example, they might want to keep the house but can’t afford the monthly payments. They could end up having to sell it, or your lender might foreclose on the house.
Fortunately, a little planning goes a long way and can save headaches all around.
Overview of Applicable Law
First, it’s important to know that no one is forced to take possession of your house—and mortgage—if they don’t want to. You are not automatically setting anyone up for financial ruin by leaving a mortgage when you die. Second, check to see if your mortgage contract has a due-on-sale clause. Chances are that it does.
The Garn-St. Germain Depository Institutions Act of 1982 allows your heirs, if they are closely related to you, to take over mortgage payments. However, if your heir is not related to you, and your contract has a due-on-sale clause, the mortgage lender has the right to ask for the mortgage balance due.
Even if a nonrelative heir holds joint title to the house, the lender can still ask for the balance due. In many cases like this, the lender allows the nonrelative heir to refinance the mortgage as long as the heir can document the ability to pay.
What You Can Do Now
Gauge the level of interest in your house among prospective heirs. For instance, if you have a spouse who is likely to outlive you, the spouse may want to stay in the house. Determine the likelihood of your heirs being able to pay off the house using their own means.
Look at your finances. This can get complicated, so don’t be afraid to talk with an attorney or accountant. How much do you have in savings? What does your debt look like? Which creditors are due payment from your estate if you die?
Examine how much you pay yearly in property taxes, house insurance and for mortgage payments. Calculate how much money your estate might realistically have in the event of your death after creditors are paid. Is it enough to pay off your mortgage?
Consider whether life insurance works for your situation. If your estate will have enough to pay off your mortgage and then some, you might not need insurance. If your financial picture is not this rosy, or you are relatively young, have little savings and have dependents, then you probably do need life insurance. In general, you’re looking at two types of life insurance: regular term and mortgage protection.
- Regular term life insurance offers more flexibility and costs less. Your heirs receive the money and decide how to allocate it. If they want to pay off the house, they can. If they don’t want to, they don’t have to. There are some limitations, though. For instance, preexisting conditions might keep you from qualifying; in such cases, mortgage protection life insurance could work.
- With mortgage protection life insurance, the insurer usually gives your lender the benefit payout directly. This kind of insurance makes sense if you know your heirs will need a place to live, and you’re not sure they can use a term insurance payout wisely. While you can’t be denied for preexisting health conditions, make sure you understand any policy restrictions before signing.
One small thing that helps is setting up automatic monthly payments.
Death often leads to confusion and chaos. Automatic payments ensure that a lender has no reason to foreclose; your payments are made on time no matter what. By looking at your finances now and planning accordingly, you ensure that someone who wants your house can keep it. Revisit the situation every few years, and make adjustments as needed.