Nobody takes out a mortgage with the expectation of dying before paying it off. Mortgagees typically don't accelerate their payments with that eventuality in mind. What becomes of your mortgage in the event of your untimely death depends a great deal on whether you've made an estate plan. Even if you haven't, however, it's possible that the mortgage can pass to your heirs without a glitch.
When a mortgagee passes away, the mortgage may be passed on to a cosigner, surviving spouse or a benefactor.
If you took out the mortgage with another individual – such as your spouse – your death doesn't change its terms. The lender will automatically look to the other borrower for the mortgage payments. That's what co-signing is all about. If one borrower can't or won't pay for some reason, the other is legally on the hook for the entire amount of the loan.
If yours is the only name on the mortgage, federal law might have your back – or at least the back of the person who inherits your house. The Garn-St. Germane Depository Institutions Act of 1982 prohibits lenders from calling the mortgage due when the mortgagee dies and the house passes to a new owner. The person who inherits your house can just keep making the mortgage payments. As long as payments remain current, there's nothing the lender can do to force refinancing or foreclosure. There's one catch, however. The individual must either be named on the property's deed as a co-owner, be your relative, or have been left the house in your will.
If your mortgage doesn't qualify under the provisions of the Garn-St. Germane Act and if you don't have a co-owner, the mortgage may be savable if you thought to purchase a life insurance policy or mortgage life insurance. The beneficiary of your life insurance policy can pay off the mortgage with its death benefits, assuming he or she also inherits the house. Mortgage life insurance will pay off your mortgage so it can pass to a beneficiary free and clear of a lien.
Refinancing the Loan
If the person inheriting your home can qualify, he or she also has the option of refinancing the mortgage. This could be a good option for the person if your existing mortgage carries a high interest rate or if restructuring the loan might otherwise result in a lower monthly payment. Of course, he or she would have to be able to afford the payments after the refinance, or your home could ultimately be lost to foreclosure. This could happen as well even if your mortgage remains intact under the terms of the Garn-St. Germane Act. The provisions of the Act only protect your property if the mortgage is kept current.
If no other options exist, the executor of your estate can sell your other assets to pay off the mortgage. If you don’t leave sufficient other assets to manage it, your executor might be forced to sell the property as part of the probate process. After paying off the mortgage and your other debts, the remaining proceeds would go to your beneficiaries, either those you named in your will, or – if you didn't leave a will – your heirs as determined by state law. The one sure thing about a mortgage you leave behind is that someone must pay it. Otherwise, the property will revert to the lender.
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