When someone dies, debts such as credit cards and mortgages do not suddenly disappear. Instead, all debts and assets become part of the deceased person’s estate which someone else will have to settle. Crucially, mortgage payments must continue to be met to prevent the lender from foreclosing on the home and forcing anyone living in the property to move out.
Understanding your options and carrying out some basic estate planning is therefore important if you want to ensure those you leave behind do not end up in financial difficulty or without a roof over their head.
Who will be responsible for paying the mortgage when you die?
This will depend on whether there is a co-owner or co-signer, or if you have named a beneficiary in your will.
If you applied for your mortgage with a spouse or partner, the process should be relatively straightforward. In the event of your death, the co-owner would automatically take on responsibility for the mortgage payments and they would also become the legal owner of the property. This means they would have the right to stay put, refinance to a cheaper mortgage, or sell up if they wished.
Alternatively, if you took out your mortgage with a co-signer who agreed to share responsibility for the loan, that person would become liable for paying off the remaining mortgage after your death - even if they were not living in the home.
If there is no co-owner or co-signer, you will need to name a beneficiary in your will to inherit the property and take over the mortgage. This is important as if you die without a will (known as dying intestate), state law will govern who gets your property and assets and this could result in loved ones missing out. Fortunately, the best online will makers ensure creating a will is quick and convenient and using these services can be more affordable than approaching a legal professional.
Note that it is sensible for anyone taking on responsibility for the mortgage payments to get in touch with the lender as soon as possible to update them on the situation. If no one takes on the responsibility after you die, the lender will likely foreclose on the property.
Protecting your loved ones
Although your debts become the responsibility of your estate after you die, real estate works a little differently. Under federal law, lenders must allow family members to take on a mortgage when they inherit a property. This prevents the due-on-sale clause from being triggered, which usually requires the mortgage to be repaid in full when the property transfers to a new owner.
Your heirs will not need to qualify for the mortgage or prove that they have the ability to repay the loan. They will have the option of approaching the best refinance mortgage companies to reduce their monthly payments, or paying off the loan entirely.
However, if your heirs are unable to keep up with the payments, and your estate is not sufficient to cover the outstanding mortgage, your heirs may be forced to sell the property to pay back the loan. If not, the mortgage lender will still be able to foreclose on the property.
For this reason, it is prudent to provide a way for your heirs to afford the mortgage payments, as well as the upkeep of the home, property taxes and homeowners insurance.
You could do this by leaving your heirs other assets from your estate, such as money from a savings account (you’ll need to put these wishes in your will). Or you could choose to name your heirs as a beneficiary of a life insurance policy.
How life insurance can help
The best life insurance policies will cover your mortgage costs and also provide an income to your loved ones to ensure they would not end up in financial difficulty if you were no longer around. As well as offering financial support to family members, a co-signer can also be named as a beneficiary, with the payout allowing that person to pay off the mortgage as soon as possible.
Life insurance gives you the option of choosing the level of cover you want (the payout your beneficiaries will ultimately receive) and the term of the policy itself. Whole of life policies are typically more expensive as they have no end date, while term policies are slightly cheaper and will only pay out if you die within a pre-agreed term.
Alternatively, you could look at mortgage life insurance, or mortgage protection insurance (MPI). With this type of plan, your lender will receive a check to pay off the remainder of your mortgage in the event of your death.
The drawback is that the value of a mortgage protection policy decreases each year, in line with the mortgage debt. And your heirs won’t get a cent as the money goes directly to the lender. Because of this, experts tend to recommend buying a straightforward life insurance policy instead.
Providing the payout is sufficient, life insurance can also be used to cover other debts that may be left unpaid when you die, such as credit cards and personal loans. This is an important consideration as if your life insurance policy does not cover these debts and they cannot be repaid from your estate, state law may request that the executor sells your home to pay them off. Any money left over after selling your property and clearing the debts will go to the heir of your home.
Finally, it is also worth arranging the best final expense insurance to cover the cost of your funeral and burial and ensure your loved ones would not be left out of pocket.