What Happens to a Mortgage in an Emergency?
Living by yourself, and paying your own mortgage, brings a lot of questions to the table that you may not have considered before. I like to think (with my Type A personality and intense love of research) that I’m usually on top of things. But this month, I’ve been thinking about writing a will, and eventually having to care for my parents, and what would actually happen to my mortgage if I were in a serious accident tomorrow? What happens to a mortgage in an emergency?
This is a kind of heavy topic, but worth thinking about at least once so you’re prepared in case the worst happens.
Mortgages and Death
Obviously, if a mortgage owner is getting older and starting to make plans for their final days, they’re going to talk to the mortgage broker and their family and decide what to do with their mortgage when they die.
But if the mortgage holder dies suddenly, here are a few things that could happen to the mortgage and home:
- Your heir takes over your mortgage at the same interest rate and payment amount as you were maintaining. If it’s specified in your will who inherits the house, it’s their responsibility to keep up on the mortgage. If the heir is not specified, interested parties will need to discuss who takes over with the mortgage lender. But they also have to make sure the mortgage is being paid in the meantime – the house should never go into foreclosure during this process.
- Your heirs refinance the mortgage to get a lower interest rate and monthly payment, and essentially take over the home on their terms.
- Your estate pays off the home and it goes to an heir with no mortgage. Obviously, this is an ideal scenario for everyone involved, but not many people have enough money in their estate to cover the funeral costs and paying off their home at the end of their lives.
- No one wants or can afford the home, so the house is sold to cover its own costs. Your heirs can also walk away from the house costs, essentially giving it back to the lender at whatever value the lender can get out of it. Your heirs get no money, but they also don’t inherit the debt.
- Your reverse mortgage kicks in — in this scenario, if you and the co-borrower are both gone and not inhabiting the home anymore, the loan is due on your death. If your heirs can’t afford to pay cash for the difference on the loan or can’t qualify for a new loan, the house has to be sold. Your heirs may get whatever equity was in the house when it was sold, but that may not be much.
- You left too much debt, and the house is collateral. If there are outstanding bills and liens when you die — maybe from medical debts or long-term loans-the house may be seized and sold no matter what your will decrees state so that your debts can be paid off. At this point, the only way to keep the house is for your heirs to hire an estate attorney and get help settling your debts.
Mortgages and Divorce
Unfortunately, adding a mortgage into a divorce can make an already-messy process even more messy. There are a couple ways a mortgage gets handled when a divorce is in the works:
- One co-borrower refinances the mortgage under their own name. This means one person is certifying they have enough money to not only make mortgage payments on their own, but that they can also pay the other borrower’s earned equity in the house at the time of refinance. The new mortgage in this kind of split usually ends up looking like half the equity plus the remainder of the loan amount. Or the co-borrower leaving the mortgage can choose to waive their rights to equity in a quit-claim deed.
- Both parties agree to a sale and equity split. If neither party can maintain the mortgage, or neither party can agree on who gets to stay, sometimes the fairest way is to sell the home and divide the equity from the sale.
- The house isn’t worth the remainder of the mortgage. When a house can’t be sold for equity, and both parties would lose from a sale, the options are a little fuzzier. The house can be sold in a short sell that basically pays off the bank, but no one else gets money for it. It can be rented out and maintained through third parties. Or both parties can figure out how to continue living there and paying for it until their situations improve.
- You sign a gentleman’s agreement to wait and split equity later. This is a rare case, and requires a lot of trust between both parties and a lawyer’s involvement. But sometimes, one person leaves the house, the other maintains the mortgage at the current rate, and years later when the house sells, the person who left receives a reduced percentage of the equity from the sale.
Mortgages and Retirement
When you can see retirement in a few years and are ready to kick back and relax, it’s a good time to consider what to do with your mortgage. A lot of people try to increase payment amounts to pay the mortgage off sooner and go into retirement debt-free, but that’s only a good strategy if you believe you’ll spend the rest of your life (or at least another decade or so) in that house.
If you get a payout on retirement, consider whether you want to use it to pay down your mortgage, or if you’d like to use it elsewhere. Also consider how much of your monthly mortgage payment is going toward interest vs. principal and how much money you have in your retirement savings. If your 401(k) or IRA accounts are lower than you’d like, maybe your retirement money goes to them first and you maintain your mortgage for the time being.
Each retirement and each mortgage are unique, so if you’re facing retirement and unsure of what to do with your mortgage, you still have a lot of choice. Hire a financial adviser for a few months to help you plan the best way to make your mortgage meet your retirement needs.