While protections are in place for people who inherit a house with a mortgage, allowing them to assume mortgage payments under the original loan terms, no such protections are in place for home equity loans. If you have inherited or expect to inherit a house with a home equity loan, learn what to expect and what you can do.
- After a loved one passes, their estate may go through probate depending on where you live and how it was set up.
- Notify the lender right away and make payment arrangements so that the loan doesn’t default while the estate is settled.
- You can ask to assume the home equity loan under the original terms, but the lender may say no and require that you pay off the home equity loan immediately.
- To pay off the existing home equity loan, you can use your own cash, take out a new home equity loan, refinance, or sell the property.
What Happens After Your Loved One Passes
Depending on the state and the way that the estate was set up, you may have to go through probate to settle the estate and determine who gets what property and what assets the estate may have to pay off any existing debts like a home equity loan.
Notifying the Lender
When your loved one passes, you will need to notify the lender that held the home equity loan right away. The lender may require you to pay off the loan immediately. If this happens, inquire about payment deferment options or the possibility of assuming the loan payments. This can get especially tricky if you’re waiting on probate, or if your inheritance of the property could be contested or shared among other people with whom you don’t get along. Be cautious about assuming debt or making payments on a property that you may not end up with. Consulting with an attorney or estate specialist can help you decide what is best for your specific situation.
The interest on a home equity loan is only tax deductible if the loan is used to “buy, build or substantially improve” the home that secures the loan.
Your Options for Dealing with the Home Equity Loan
The simplest option that can give you breathing room while you take time to grieve and decide what to do next is to pay off the home equity loan. If you don’t have the cash to do that or are in a messy financial situation with multiple individuals inheriting the same property, you have many other options.
Assuming the Loan Payments on the Existing Home Equity Loan
If the existing lender allows you to, you may be able to assume the loan payments on the existing home equity loan. While the Consumer Financial Protection Bureau requires this on mortgages, it isn’t required for a home equity loan, so be prepared for the lender to say no.
You can refinance the property that the home equity loan is on to pay off the existing home equity loan and put the new mortgage in your name or in the names of everyone who has inherited the property.
Take Out a New Home Equity Loan
Taking out a new home equity loan to pay off the existing home equity loan that was in your loved one’s name may be cheaper than a refinance, depending on the amount needed and interest rates. With interest rates rising rapidly and now at the highest they have been since 2010, the existing mortgage most likely has a lower interest rate than you can get with a refinance.
Sell the Property
If you do not want to live in or retain ownership of the property, then selling the property and using the proceeds to pay off the home equity loan may be the simplest option. Even if you do want to live in the property, you may have to sell if you can’t qualify financially for a loan to pay off the existing home equity loan.
Buy Out Other Heirs
If you’re inheriting the property with several other people and one of you wants to remain in the home, then that person can buy out the others. When there is a home equity loan on the inherited property, this can be a little more complicated. The person who is staying will need to buy out the others and pay off the home equity loan. If they don’t have enough cash, they will need to take out a new home equity loan or do a cash-out refinance on the property.
How can I find out if the home I inherited carries a home equity loan?
Ideally, the person who left you the home kept all their documents organized so that you can easily determine what loans (if any) are on the property and what company holds them. Unfortunately, not everyone keeps their documents in order. You may have to hunt through their papers to find billing statements for a home equity loan or run through their bank statements to find recurring payments. You can also run a title search on the property you inherited to see if there are any liens on it.
What happens if probate takes a long time?
If probate takes a long time and you’re unwilling or unable to make payments on the home equity loan while the estate is pending, then the executor of the estate will need to make arrangements with the lender to pause or defer payments. If no arrangements and no payments are made, the home equity loan will default.
What happens if the home equity loan defaults?
If the home equity loan defaults, the institution that holds the loan will foreclose on the home that you’ve inherited. This is why it’s very important to do everything you can to keep the loan in good standing or pay it off.
The Bottom Line
You have many options after you’ve inherited a house with a home equity loan. Give yourself some time to grieve, and don’t be afraid to seek professional help and advice when deciding which option to take.