What do you do about your outstanding mortgage loans in estate planning? At one time it was everyone’s goal to clear their mortgage and for their property to be owned outright with no payment burden on their heirs. Today, however, this is not always possible due to high property and land prices, and various mortgage options such as interest-only options where the so-called homeowner never actually owns the home.
In such cases, the estate passes onto an heir, who is then responsible for the real estate and its financial management. However, if there is still a mortgage loan owed on the property, this is legally classed as a secured loan. Unlike an unsecured loan, if a loan is secured on the property, which by definition a mortgage is, then the creditor has first call on the real estate.
What if You Are Left a Property With Mortgage Loans?
If you have been left a property that has a mortgage, either in a will or by probate, the outstanding amount of the mortgage will be taken from the estate before it is disbursed to the beneficiaries. Debts are not passed on, but can be claimed by creditors from the estate. This means that if there are insufficient cash funds available, then assets, including the property if necessary, will be sold to raise the sum still owed on the mortgage.
This can be stopped if a particular beneficiary was willing to take the mortgage on. In this case the mortgage can be refinanced and the beneficiary can take possession of the property. Neither the lender nor the beneficiary is obliged to agree to this, so it must be by mutual agreement. Hence the need for intelligent estate planning.
Estate Planning and Mortgaged Property
The estate plan should be organized so that the sum still owed on the mortgage is taken from the estate and paid by the executor prior to the will reading. One way to avoid the above situation is to take out a life insurance that lasts the same term as the mortgage.
Then, if you die before the mortgage is paid off your beneficiaries will receive a lump sum that can be used to clear the outstanding mortgage debt. Your beneficiaries can then take possession without having to negotiate with the mortgage lender. This is basic estate planning for anybody with a mortgage.
Creditors Have First Call
It is true that your heirs can just take the cash without paying off the mortgage, but they would not receive the money until the mortgage lender took the outstanding balance. That is the way probate works: creditors first then heirs, irrespective of the will.
If you own a home, or if you expect to be left a home in a relative’s will, make sure that there is no mortgage still attached to it. If so, it makes sense to arrange a life insurance for the lifetime of the mortgage. You will then be protecting your heirs from the possibility for them losing your home to raise the mortgage balance on your death. For more information, please contact Anthony DiLeo at (732) 264-2700 x 18, or email at [email protected]