American homeowners are collectively carrying nearly $10 trillion in mortgage debt according to the most recent statistics published by the Federal Reserve. This has important estate planning implications. Unlike unsecured debts, a mortgage is tied to a house, not an individual. This means that after you die, your estate and heirs may be stuck paying off your mortgage.
The Mortgage Still Must Be Paid
The terms of a mortgage loan generally do not change due to your death. The executor of your estate must continue making monthly payments on the mortgage to keep the loan current. If you want to keep the home “in the family,” your heirs must be able to take over these payments or attempt to renegotiate the loan to secure a more favorable interest rate.
Of course, it may be possible to spare your heirs the burden of dealing with a mortgage if you have enough assets in your estate to pay off the loan outright after your death. For example, you could purchase a life insurance policy, which would give the estate enough cash to satisfy the mortgage. There are even “mortgage protection insurance” policies that you will directly pay the benefit to your lender.
Avoiding Foreclosure
If your estate is unable pay off the entire mortgage and your heirs cannot afford to keep making the payments, then your estate may be forced to sell the property. Otherwise the mortgage lender will likely foreclose. In California a lender can take advantage of non-judicial foreclosure, meaning they can sell a property without a court order in as little as 120 days following a default. In some cases the lender may also file a claim against the estate to cover any losses due to foreclosure, although it is unlikely to do so if the estate already lacks sufficient assets.
What About Reverse Mortgages?
Many elderly homeowners take advantage of a special type of loan known as a “reverse mortgage.” Like a traditional mortgage, a reverse mortgage is a loan secured by a lien against real property. The key difference is that a borrower does not have to make monthly payments on a reverse mortgage. Instead, all payments are deferred until the owner sells the property or dies. Upon death, the balance of the loan is due.
Talk to a San Diego Estate Planning Lawyer
Your home is likely your most valuable asset. As such it is essential to consider the impact of an outstanding mortgage loan on your estate planning. A qualified California estate planning attorney can review your situation and help determine the best course of action. Contact the Law Office of Scott C. Soady if you would like to speak with someone today.