Estate planning and mortgages go hand-in-hand as around 37% of Americans still have a mortgage balance when they pass away.
So what happens to your mortgage when you’re gone? And is there anything you do to make the transfer of property easier on your loved ones? Get the answers to these important questions in this guide to estate planning and mortgages.
Estate Planning and Mortgages 101
Estate planning is the process of preparing your assets and liabilities for distribution upon your death. Unlike a will (which simply outlines your wishes for passing your belongings to friends, family, charities, and other beneficiaries upon your passing), an estate plan outlines the strategic plan to make the distribution of your assets easier on your loved ones, saving them time and money through the probate process.
What is Probate?
Probate is the process of paying off your debts and transferring your assets to your inheritors upon your passing. When you have a will or estate plan in place, the probate process can be straightforward because there is a clear plan for the executor of your will to follow. When you pass without a will (“intestate” in legal terms), the probate process is longer and messier because the court system is responsible for processing your debts and assets in accordance with state law. Probate can take months, even with a will in place, and can take over a year without a will.
Secured Debts vs. Unsecured Debts
All debts can be classified as secured or unsecured. Secured means there is an asset being used as collateral for the loan. Your mortgage loan is a perfect example. Your home is the collateral for the loan, so if you fail to pay your mortgage, the home can be sold to repay the debt. Credit card and student loan debt, on the other hand, is unsecured because there is no collateral tied to those debts.
This distinction matters in estate planning because creditors have the right to seize the collateral for unpaid secured debts. For example, if there is a balance on your mortgage loan that goes unpaid upon your death, the lender has the legal right to foreclose, taking ownership of the property to recoup their losses on the debt. Creditors of unsecured debts can go after your estate to collect payment, but don’t have the right to seize property to cover the debt.
Who is Responsible for Making Mortgage Payments Upon the Borrower’s Passing?
The executor is responsible for making mortgage payments upon the borrower’s passing. If an executor is not named in a will, the probate court will appoint an executor.
It is important for the executor to continue making timely mortgage payments throughout the probate period to avoid possible late fees or even foreclosure.
If the house is gifted as an inheritance, the inheritor will be responsible for making mortgage payments after the probate (assuming that the mortgage wasn’t paid off during the probate process).
What if the Inheritor Can’t Afford the Mortgage?
If the inheritor can’t afford the mortgage (as well as property taxes, maintenance, and the other costs of owning the property), they have a couple of options. They can refinance the mortgage to reduce the monthly payment, or they can sell the property.
3 Tips for Leaving Your Home as a Legacy
If you plan to leave your home as a legacy to your children or grandchildren, there are a few steps you can take now to make the property transfer easier on your loved ones when you pass. Here are three estate planning tips for leaving your home as a legacy.
1. Meet with an Estate Planning Attorney.
Most people have limited (if any) experience with estate planning and probate. But estate planning attorneys deal with this every day. They have first-hand knowledge of what can go wrong during the probate process, and they know how to manage your estate planning to ensure a smooth transition and even reduce the tax burdens of everyone involved.
2. Consider Creating a Trust.
A trust can help your inheritors avoid probate time and expenses. If your home is owned by a trust, the trust will continue to own your home upon your passing. You can arrange for your intended heirs to control the trust, effectively giving them ownership of the property through the trust. Discuss your trust options with your estate planning attorney.
3. Help Your Inheritor Cover Property Expenses.
If you are concerned that your inheritor may struggle to pay the mortgage or other property expenses, you can create instructions in your estate planning process to cover these expenses. For example, a life insurance policy with the same terms as the mortgage would free your inheritor from worrying about the mortgage payments and eliminate the risk of foreclosure.
As always, we’re here to answer any questions you have and help guide you through the mortgage loan process. Give us a call or start your application today.