Mortgages are inherently about death. The word “mortgage” comes from Old French for “pledge of death”, which means that the loan expires after being paid in full; if not paid, the property is taken and is “dead” to the owner.
But what if your death pledge survives you? Who pays your mortgage after you die?
Your lender can seize your house if it doesn’t continue to receive regular payments after your death, says Sara Hire, a San Jose, Calif., lawyer who specializes in estate planning. To avoid this, you should instead come up with a plan that would pass your house on to your heirs. Depending on your situation, this may involve having a co-borrower or purchasing insurance to help someone make the payments after you leave. This should definitely include making your wishes clear and legally binding by will or trust.
Who is responsible for mortgage payments after your death?
If you and your spouse took out the mortgage together, that co-borrower would be responsible for making the payments and would be the legal owner, free to live in the house, refinance loan it or sell it. If he or she is not on the loan – for example, because of credit problems – talk to a lawyer about your spouse’s rights; inheritance laws vary from state to state.
If you do not have a co-borrower but you have a co-signer, this person will have to intervene. Wells Fargo spokesman Tom Goyda said it makes sense for anyone with payment responsibilities to notify the lender rather than just sending checks. This can prevent miscommunication and allow your heirs to assess all payment options.
From 2014, a Consumer Financial Protection Bureau Rule makes it easier for anyone who inherits a home to get a mortgage and qualify to make payments. Federal law also prohibits lenders from requiring full loan repayment each time a mortgage loan is transferred to someone else. (Note that if you also have a home equity loan, lenders may demand full payment.)
In the absence of a spouse or co-signer, you must designate a beneficiary. Once the title is passed to that person, they can refinance the loan if she wants to keep the property.
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Consider adding insurance
If the person you’re leaving the house would have a hard time making the payments without you, you may want to purchase insurance to help them with those expenses. Hire says that a life insurance policy is often recommended if you have dependent children or if your beneficiaries don’t have a lot of 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 what was left on the mortgage. The downside is that the value of the policy decreases each year because it will only pay off what you still owe on the loan. And the money goes straight to the mortgage lender, not your heirs.
For most people, Hire recommends life insurance as the best option. The value of the policy remains the same regardless of the amount owed on the mortgage. And the payment goes directly to your beneficiaries, which allows for more flexibility. They can use it to make mortgage payments if that’s what suits them best, or they can use the insurance money for other needs.
Put your wishes in writing
The recent death of musician Prince shows the importance of making such a plan. It appears he didn’t leave a will or trust, and now several parents are making claims on his estate, forcing the courts to get involved, which will likely be a long and costly process.
When you own property, writing a will or creating a trust may be the best way to make things easier for those around you, says John Palley, a lawyer based in Sacramento, Calif.
Most people will find that a will is cheaper and offers sufficient protection. But for others – especially those with high net worth estates or who live in states with high probate fees – a trust is worth the cost and the extra effort. Make sure that the people who would have to make your wishes come true would know how to find the mortgage and other documents if you were no longer there.
A will or trust should ensure that your house passes to your heirs as quickly as possible. Without it, the state will take over and appoint heirs for you, or the bank could exclude you.
Also, until they were named as beneficiaries, your loved ones would not be responsible for your mortgage payments, even if they were living in the house at the time of your death.