It can take some time to pay off a home equity loan, so what happens to it after the original borrower dies? Does your family have to pay off your loan? Learn some of the options your heirs will have in case you die before you can fully pay off your home equity loan.
What Happens to Debt After Death?
When you die, your debts are treated differently depending on the type of debt, any credit insurance you have, and the agreements you may have with your family or guarantor to pay off the loans. Most loans, particularly secured debts (those using collateral), can be paid off by selling off the collateral (such as your house, car, or other assets). Similarly, home equity loans are secured by real estate so the unpaid debt is passed on to your “estate.” That means any property you own can be sold or mortgaged to repay the loan. If there is a joint owner named on the property, or if your family wants to retain full rights to the residence, they may be able to take over the loan and continue making payments.
Options for Inherited Property With a Home Equity Loan
If you have inherited a property with a home equity loan, you have some options.
Pay the Loan Out of Pocket
If you have the financial capacity to pay off the loan, this is a relatively simple option. It may be costly, but it’s hassle-free and you retain the property.
Refinance the Property
If paying out of pocket is a big stretch but you don’t want to sell the property to pay off the remaining debt, you can consider refinancing the property. Refinancing allows you to take a new loan with more favorable terms in order to pay off an existing loan.
Sell the Property
If you have exhausted all the other options, you may have to sell the property to pay off the debt. The leftover money is yours to keep, but if the value of the house is lower than the amount owed, you may have to pay the difference out of pocket.
How To Prepare Heirs for a Home Equity Loan
Whenever you’re taking on a loan, it’s important you understand the terms and conditions of what you’re signing up for. And although death is often unexpected and a sensitive issue to discuss, letting your family know what their next steps should be can relieve undue stress following your passing. This could be as simple as telling them about your home equity loan policy, or you may choose to draw up an in-depth repayment plan. You also have the option to purchase credit insurance, which can protect your heirs by paying off your existing debts in the event of death, severe injury, or disability. Want to read more content like this? Sign up for The Balance’s newsletter for daily insights, analysis, and financial tips, all delivered straight to your inbox every morning!
