What Happens to a Home Equity Loan on Inherited Property?

Repayment is often due immediately, but you may have other options

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A home equity loan is a form of debt that uses the equity, or what you’ve paid into your house, as collateral. These loans allow you to borrow against the value in your home—typically up to 80%—and require repayment on a fixed monthly basis. Since home equity loans often come with lower interest rates, many people prefer them to traditional loans.

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.

Key Takeaways

  • Following a homeowner's death, any remaining debt on a home equity loan may be transferred to their estate to be paid off.
  • The property securing the home equity loan and other assets can be sold to repay the loan. Heirs may also pay the loan out of pocket or refinance the property.
  • Credit insurance can pay off a home equity loan in case of death or injury.

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.

A lender may call for the immediate repayment of a home equity loan upon a homeowner’s death.

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.

Refinancing won’t necessarily erase all your debts. You still have to pay off the new loan and potentially spend more money on transfer fees and closing costs, so make sure the costs are worth the benefits.

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.

The premium for credit insurance is sometimes included in the total amount of your loan, which means you may also be paying interest on it.

Frequently Asked Questions (FAQs)

How soon after a borrower’s death does a home equity loan become due?

The repayment due date after the borrower’s death typically depends on the loan’s terms, the status of your co-signer or guarantor, and the state in which the property is located. If you have inherited a home equity loan, you may be able to continue making payments just as the original borrower did. If payments are not made, the lender may file a claim against an estate after a few weeks or months of the death, depending on local laws.

Can I take out a home equity loan on inherited property?

While this depends on the type of loan you’re seeking, the market value of the property, and the state you live in, beneficiaries who inherit property typically may qualify for a loan if the property has sufficient equity. As long as you have the required documentation to prove ownership of the assets, you can take out a home equity loan against inherited property.

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Article Sources

  1. 1st Source Bank. “What Happens to Your Debt When You Die?

  2. Consumer FInancial Protection Bureau. “CFPB Clarifies Mortgage Lending Rules To Assist Surviving Family Members.”

  3. Consumer Financial Protection Bureau. “Home Equity Loans and Home Equity Lines of Credit.”

  4. Office of the Insurance Commissioner - Washington State. “Credit Insurance: Do You Really Need It?

  5. North Coast Financial. “Home Equity Loan on Inherited Property.”