Inheriting a house with a mortgage Explained

Ashly Chole Senior Finance Researcher

Last Updated 18 June 2024

What To Do If You Inherit a House with a Mortgage?

Inheriting a house with a mortgage means you have received ownership of a property with an outstanding mortgage balance. The previous property owner had not completely paid off the mortgage before passing away or transferring ownership. As the new owner, you will be responsible for paying off the remaining mortgage balance.

What Is A Mortgage?

A mortgage is a loan to purchase real estate, typically a home. It is a type of secured loan, meaning that the borrower pledges the property being purchased as collateral for the loan. The loan is usually paid back in instalments over several years or decades, with interest charged on the outstanding balance. The mortgage terms, including the interest rate, length of the loan, and monthly payment amount, are agreed upon between the borrower and the lender when the mortgage is taken out. The lender will typically require a down payment from the borrower, which is a portion of the property's purchase price paid upfront to reduce the loan amount.

There are several legal implications when you inherit a house with a mortgage. First, you must make the mortgage payments on time to avoid defaulting. Additionally, you will need to transfer the property title to your name, which may require legal assistance. Understanding any tax implications associated with inheritance and mortgage payments is also important.

What Happens to a Mortgage When You Inherit a House?

When you inherit a house with a mortgage, the mortgage does not disappear. The mortgage company still has a legal claim on the property until the mortgage is paid off in full. As the new owner, you will become responsible for making the mortgage payments or potentially refinancing the mortgage in your name.

How Is the Mortgage Payment Affected When You Inherit a House?

When you inherit a house with a mortgage, the mortgage payment will continue to be due as scheduled. However, it is important to ensure that the mortgage company is aware of the change in ownership and that the new owner is making the payments. Any changes to interest rates or refinancing options may also affect the mortgage payment amount.

Can You Sell an Inherited House with a Mortgage?

You can sell an inherited house with a mortgage. However, the outstanding mortgage balance must be paid off first before you can transfer ownership to a buyer. You will need to pay off the mortgage balance through the sale of the property or by using other funds.

Who Is Responsible for Paying the Mortgage on an Inherited House?

As the new owner of the inherited house, you will be responsible for paying the mortgage. You must make the mortgage payments on time and in full to avoid defaulting. The mortgage company may initiate foreclosure proceedings if you cannot make the payments.

What Happens If the Mortgage on an Inherited House Is Not Paid?

If the mortgage on an inherited house is not paid, the mortgage company may initiate foreclosure proceedings. The property will be sold at a foreclosure auction to repay the outstanding mortgage balance. The property's new owner will be the highest bidder at the auction.

Can You Refinance an Inherited House with a Mortgage?

You can refinance an inherited house with a mortgage. Refinancing the mortgage may allow you to obtain a lower interest rate or change the loan terms to better suit your financial situation. However, it is important to consider any fees or penalties associated with refinancing.

What Are the Tax Implications of Inheriting a House with a Mortgage?

Inheriting a house with a mortgage may have tax implications, depending on the value of the property and the outstanding mortgage balance. It is important to consult with a tax professional to understand any potential tax liabilities or benefits associated with the inheritance and mortgage payments.

Can You Transfer a Mortgage on an Inherited House to Someone Else?

In general, transferring a mortgage on an inherited house to someone else without refinancing the mortgage in their name is impossible. The new property owner must apply for a new mortgage in their name and use the proceeds to pay off the outstanding mortgage balance on the inherited property.

What Happens If the Inherited House Is Worth Less Than the Outstanding Mortgage?

If the inherited house is worth less than the outstanding mortgage, this is known as being 'underwater' on the mortgage. In this situation, the new property owner may negotiate with the mortgage company for a short sale or deed instead of foreclosure. The mortgage company may allow the new owner to transfer ownership of the property to the mortgage company in exchange for forgiveness of the remaining mortgage balance.

What Happens If the Inherited House Is Worth More Than the Outstanding Mortgage?

If the inherited house is worth more than the outstanding mortgage, the new owner may sell the property and use the proceeds to pay off the remaining mortgage balance. Alternatively, the new owner may keep the property and use the equity to obtain additional financing or improve the property.

How Can You Determine the Value of an Inherited House with a Mortgage?

The value of an inherited house with a mortgage can be determined through a property appraisal or by researching recent sales of comparable properties in the area. It is important to understand the property's value to determine the equity and potential profitability of keeping or selling the property.

Can You Keep an Inherited House with a Mortgage as a Rental Property?

You can keep an inherited house with a mortgage as a rental property. Renting may allow you to generate rental income and potentially build equity in the property over time. However, it is important to consider the costs of maintaining and managing the property, as well as any tax implications associated with rental income.

What Happens to the equity in an Inherited House with a Mortgage?

The equity in an inherited house with a mortgage belongs to the property's new owner. If the property is sold or refinanced, the equity can be used to pay off the mortgage balance or for other purposes. The amount of equity will depend on the value of the property and the outstanding mortgage balance.

Can You Use the Equity in an Inherited House with a Mortgage to Pay off the mortgage?

Yes, you can use the equity in an inherited house with a mortgage to pay off the mortgage balance. Equity release may be done through a cash-out refinance or by selling the property and using the proceeds to pay off the mortgage. However, it is important to consider the costs and fees associated with refinancing or selling the property.

What Are the Risks of Inheriting a House with a Mortgage?

The risks of inheriting a house with a mortgage include potential financial burdens associated with making mortgage payments, the costs of maintaining and managing the property, and the potential for the property to decrease in value over time. It is important to carefully consider these risks before accepting an inheritance and to consult with financial and legal professionals for guidance.

Can You Negotiate the Terms of an Inherited Mortgage?

In some cases, it may be possible to negotiate the terms of an inherited mortgage with the mortgage company. Changing mortgage terms may include refinancing the mortgage or modifying the loan terms to better suit the financial situation of the new owner. However, it is important to understand the costs and fees associated with these options and to work with a trusted financial professional to determine the best course of action.

How Long Does It Take to Pay off an Inherited Mortgage?

The time it takes to pay off an inherited mortgage will depend on several factors, including the remaining balance on the mortgage, the interest rate, and the monthly payment amount. It is important to make regular mortgage payments and potentially consider additional payments or refinancing options to pay off the mortgage as quickly as possible.

What Are the Options for Dealing with an Inherited House with a Mortgage?

There are several options for dealing with an inherited house with a mortgage, including selling the property, keeping the property as a rental, refinancing the mortgage, or negotiating the mortgage terms with the lender. It is important to consider each option's financial and legal implications and work with professionals to determine the best course of action.

Inheriting A House With A Mortgage Verdict

Inheriting a house with a mortgage can be both a financial opportunity and a legal responsibility. Understanding the legal implications, tax considerations, and options for dealing with an inherited property can help ensure that the new owner makes informed decisions and manages the property effectively. Working with trusted financial and legal professionals can provide valuable guidance and support throughout the process.