What happens to your mortgage when you die?

Death is never an easy topic to talk about–and even less when it comes to thinking about what happens to your finances after you pass away. 

While in your marriage “‘til death do us part” might apply, when it comes to your mortgage, death unfortunately doesn’t exempt you from paying. 

With this in mind, it’s important to be prepared and think ahead on what might happen after you pass away. Knowing the facts could help ease the burden down the line for your loved ones and potential guarantors or co-borrowers. 

Who takes on your mortgage debt after you die?

When a homeowner dies, their will or estate helps to determine who their property and other assets go to.

If you have a mortgage on your home as well as a co-signer or guarantor, the mortgage will then become your co-signer or guarantor’s responsibility. However, if you’re the only one on the mortgage agreement, nobody is responsible to take over the mortgage. In this case, there are two possible scenarios: either your house will be inherited by the person stated in your will or, if you haven’t left it to anyone, the home will then go through the process of foreclosing. A foreclosure can also happen if the new inheritor decides that they don’t want to take over the mortgage either. 

What if I inherit a home?

So what happens if you’ve inherited a home from someone that has passed away? Whether you are a surviving spouse or a beneficiary, you have the option to keep the mortgage and the home or sell it entirely.

Option 1: Keep the home 

If you’ve decided you want to continue paying the mortgage off, the good news is that the law allows you to do so without disruption to the mortgage rate or agreement. Typically a lawyer will get involved in the process of paperwork to remove the deceased person’s name from the agreement and amend it to include the new or remaining borrower. When transferring a mortgage, there might be fees that apply and it’s important to talk to a real estate lawyer to better understand what exactly the process involves. 

Option 2: Sell or refinance the home

You also have the option of selling the home once you’ve inherited it, which for many can also be a means of closure. However, if you don’t want to sell, but don’t think you can afford the current monthly payments, you can talk to your mortgage lender about the potential of refinancing the mortgage and try to secure a lower payment amount. This could get you a better interest rate but it’s important to note that this might also require you to re-qualify for the mortgage and pass the stress test on your own. 

What if there is more than one beneficiary?

This process can get a bit complicated if there are multiple beneficiaries to a home, especially if they can’t come to an agreement. If not all parties want to be involved, they have the option of selling their share to the other beneficiary to make the decision. If one beneficiary wants to turn it into a rental property, you may have to change the mortgage as it would no longer be a primary residence. The best case scenario, especially if no one is interested in living in it, is to sell the home to avoid any complications. 

Does a beneficiary need to re-qualify?

If you’ve inherited a home, you won’t have to worry about requalifying for the mortgage. This allows you to continue to make regular payments without the added burden of passing the stress test. This also applies when the mortgage term is up for renewal. The exception to this rule is if you’re looking at refinancing or porting your mortgage, in which case you’ll have to go through the financing and approval process again. 

The role of mortgage life insurance 

This situation changes quite a bit if you’ve purchased mortgage life insurance. This is not to be confused with mortgage insurance (the insurance you need to add as a premium on your mortgage payments,  if your down payment is less than 20%). 

Mortgage life insurance is a policy that covers all or a portion of your mortgage after you die. It’s paid to your mortgage lender and can offer peace of mind to you and your loved ones in the event of your passing. 

The drawbacks to it is that you need to enrol fairly early after purchasing a home (unfortunately long-time, older homeowners may not qualify for this insurance) and monthly premiums can be quite expensive. 

Plan your options from now

Thinking about our own death isn’t very easy, but planning for it will help to relieve the burden on your loved ones in the future. If you’re a homeowner, it’s especially important to create a will or estate that decides how your assets, including your home, will be divided. 

Or if you’ve inherited a home or are considering refinancing your mortgage for your estate planning, one of Pine’s mortgage advisors can help guide you with care through this time.