Mortgage Market Guide: What Happens When Someone Dies Without Paying Off Their Mortgage?
(This article is a part of mortgage market guide to provide you with answers to some of the mortgage-related questions you might have)
A mortgage is usually one of the realities of home ownership: a debt to a bank slowly paid off for a number of years, that allows you to live in your house while you pay that debt off. The bank owns the title to the home until you pay off the debt. You can then take full ownership.
However, these agreements represent long-term debts. This means that when the holder dies, their survivors’ housing security can be thrown into question.
So what really happens when someone dies without paying off their mortgage?
Well, it consists of two scenarios depending on whether they had a cosigner on their loan or not. Read this mortgage market guide excerpt to find out –
A Co-Signed Mortgage
If you have a cosigner on your loan, when you pass away, the responsibility for payment passes on to them. Co-signing means that the bank has the right to collect from either party. However, since co-signers are usually a spouse, their finances may well be tied up in your own. Having a joint account, at least for the purposes of paying off a mortgage can be helpful. These funds are not a part of probate. Instead, they automatically pass to the surviving holder. This can allow you to have a reserve cushion in case of emergencies, particularly if one partner is a stay-at-home partner, or has no reliable source of income in the case of emergency.
Being aware of who is listed as a co-signer on your mortgage, and planning for their needs, is an important step in estate planning.
A Single-Owner Mortgage
If only the decedent is listed as a signer on the mortgage, the property then passes into probate. If there is a will in place, the property will pass to a beneficiary.
The will can specify that either a) the beneficiary is subject to the mortgage and must pay it off themselves, or b) that the estate will pay it off from its own funds. Before choosing either route, you may want to consult with your beneficiary, and take a good look at your own finances, to see if your estate is able to pay off the remainder of your mortgage.
Since situations change, periodic reassessments of your will are always a good idea. There is also one other thing you might want to consider.
Mortgage Life Insurance
Much like standard life insurance, this is a life insurance policy that is intended to pay off the remainder of a mortgage in the case of a policy holder’s debt. You can either look into specialized insurance or simply purchase a policy with a similar term date as your loan.