Have you ever wondered what happens to your mortgage if you die? It’s not a pleasant topic to think about, but as with wills and life insurance, planning for what will happen to your home and mortgage if you die before the loan is paid off can make a huge difference to the loved ones you leave behind.
A mortgage obligation is not discharged upon death; rather, it stays with the estate. The promissory note generally contains a provision giving the lender the right to immediate and full repayment upon the borrower’s death. If the lender invokes that right and the estate cannot pay the outstanding loan, the lender can have the property sold in order to obtain the money it is owed.
However, if the property is bequeathed to a person, the law and/or the lender may allow the new owner to assume the mortgage and continue making the payments, especially if the loan payments are current and the new owner will be living in the home. Alternatively, the new owner may decide not to assume the mortgage and instead sell the property and pay off the balance.
If the mortgage is a joint mortgage, with both borrowers responsible for paying the loan, the surviving borrower typically assumes the mortgage. This is the case regardless of whether the survivor can afford the monthly payment without the deceased borrower’s income. In other words, the surviving borrower can be left with a mortgage that he or she cannot afford.
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Therefore, it is always a good idea to purchase mortgage insurance or life insurance that can be used to pay the mortgage in the event of the borrower’s death. It can be particularly important to have such insurance if others are living in the home and would be forced to move out if the mortgage cannot be paid.
Any insurance taken out during the home-buying process, such as private mortgage insurance (PMI), is usually intended to protect the lender and not the borrower. Thus, all borrowers should plan for the worst, even as they hope for the best.