When homeowners want to pass their home on to their children and avoid the difficulty of probate without having to move out or sign away their right to live in the home, they can accomplish their goals using a life estate. Life estates add the intended heirs onto the deed as remainder owners, while keeping all rights to use and live in the home for the owner. However, life estates have some disadvantages, especially if the homeowner needs to take out a home equity loan.
Home Equity Loans
Home equity loans, typically offered as an open line of credit available for borrowers to tap into as they need it, are guaranteed by the borrower’s equity in a home. Similar to mortgages, home equity loans provide tax incentives to borrowers because interest payments are tax-deductible for taxpayers who itemize. Because home equity loans allow the lender to place a claim against the property, all owners listed on the deed must agree to the terms of the loan.
Life Estate Ownership
Typically, property owned by life estate has two types of owners: the life tenant and the remainder owner. Making the decision to grant someone remainder ownership of a life estate means adding that person as a full owner with certain rights reserved for the life tenant. The life tenant cannot unilaterally reverse a grant of life estate, but needs the agreement of all owners to affect the ownership of the property.
Mortgaging Life Estates
When you take out a home equity loan, just as with any other mortgage, you give the lender certain rights over the property in the event you default. Primarily, the lender can foreclose on your house and sell it to recover the outstanding debt. If the life tenant were able to take out a home equity loan without consulting the remainder owner, a situation could arise where the bank and the remainder owner both have claims to the property, but no arrangement between themselves.
Borrowing Against Life Estate
If your property is owned by a life estate, you can still borrow against the property. However, you may face additional hurdles at the lender. First, bring in the appropriate documents establishing the life estate, such as your will or the deed to the property. The remainder owners will then need to be present and sign off on the loan as well. If you do obtain a home equity loan and default, not only can the lender try to settle the loan from the property, but it can also try to collect from the remainder owner.
Sean Butner has been writing news articles, blog entries and feature pieces since 2005. His articles have appeared on the cover of "The Richland Sandstorm" and "The Palimpsest Files." He is completing graduate coursework in accounting through Texas A&M University-Commerce. He currently advises families on their insurance and financial planning needs.