A mortgage can provide you and your family with a home and an investment in your future. While it gives you the means to pay for your home, it won’t provide everything for you.
One question you may want to ask yourself: If I pass away and still owe money on my mortgage, what happens?
What happens to your mortgage?
If you still owe money to your creditors when you pass away, that debt won’t suddenly disappear. Typically, most debts are recouped from your estate before you can pass them onto your heirs. This is how most assets like a home are dealt with. The executor of your estate will use your assets and savings to pay your creditors.
In the case of mortgage debt, the process is a bit different.
If someone co-signed your mortgage, they will have to take on your mortgage debt. It’s as simple as that.
If you own your home and pass away with a mortgage, the person who inherits your home assumes your mortgage debt. In this situation, there are a few scenarios.
The first option is that your heirs decide that they do not want to keep the home and assume its mortgage. In this case, they will make monthly mortgage payments until the house is sold. Upon a sale, they inherit the financial value of the home minus the mortgage.
Second, if your heirs don’t want to assume responsibility for your mortgage, the lender will start a foreclosure process to recoup the money owed to them.
Third, your heirs can accept their inheritance and continue paying the mortgage.
Some of these options may sound acceptable to you. That’s good, but here are a few things to consider.
When a property with a mortgage transfers ownership, a due-on-sale clause may require your heirs to pay the remainder of the mortgage in full, immediately. Luckily, there are legal protections that allow your heirs to keep the homes without the clause being put into effect.
What About Other Options?
Your other option is to take on an insurance policy. Let’s compare the two most common types of insurance people use: mortgage life insurance and life insurance.
Mortgage Life Insurance
Mortgage life insurance is a policy specifically for homeowners who die with mortgage debt. If you purchase mortgage life insurance, your mortgage will be paid off if you die. This means your heirs are left with a fully paid-off home.
Mortgage life insurance policies typically also include a death benefit. This is a declining benefit. That means that as you pay more of your mortgage off and your balance decreases, your policy coverage also decreases.
When you take a mortgage life insurance policy, your lender is typically the beneficiary. But different policies will pay out different amounts. Some insurance policies will pay both your lender and whoever else you choose to list as a beneficiary. Many policies will only pay your lender, however.
Term Life Insurance
A standard term life insurance policy can pay off your mortgage as well. Many people who take out a 20 years mortgage, will also get a 20-year term life insurance policy. This policy covers the outstanding balance in case you pass away. It also lines up perfectly with the length of your mortgage obligations.
Why Add Mortgage Coverage to Your Life Insurance?
There are many things you can do to prepare to hand off your property before you pass. But life isn’t always simple. If things don’t go according to your plan, the future of your home may be at risk.
That’s where insurance comes in. Life insurance coverage can make sure that there are no strings attached when you hand off your property to your heirs.
Another good reason to consider mortgage life insurance is that it’s simple to get. If you look at the requirements for other life insurance policies, that might surprise you.
Normally, you need to provide your medical history and a urine sample to get a term life insurance policy. But qualifying for a mortgage life insurance policy is easier. It usually only requires you to take a few screening questions. If you don’t have any life-threatening health issues, you should qualify.
In the end, it’s worth considering both options to see what’s right for your financial needs.