How To Refinance An Inherited Property


Taking Title When There Is An Existing Mortgage On The Home

Many people purchase homes in their 20s, 30s and 40s, with mortgage loans designed for payoffs long before the borrower passes away. However, an extended period of record low interest rates has generated numerous refinances—some to homeowners in their 50s and above. Couple this with the rising popularity of reverse mortgages, and it is quite possible that you may eventually inherit a property with an existing loan balance. If you do, you may be required to refinance in order to take ownership.

SEE ALSO: No Mineral Rights? Forget That Refinance!

When Is A Refinance Required?

When a homeowner passes away, leaving a property to one or more heirs, the estate will hold it for distribution after payment of any debts—including an outstanding loan balance. This means that the heirs cannot take title or ownership of the home until they settle the existing mortgage. In addition, there may be a “due on sale” clause within the loan requiring full payment before any property transfer can occur. While federal law largely prohibits note holders from demanding immediate settlement in the event of inheritance, they may require you to refinance the mortgage under your own name as soon as possible. For example, let us say you inherit your grandmother’s home, currently worth $250,000. She still owed $100,000 on her mortgage. If her estate includes enough cash or other assets to pay off the balance, that may be an option. Otherwise, you can choose to settle it with a refinance.

Refinancing As The Sole Heir

If you would like to move into grandma’s home, or keep it as an investment property, some note holders may allow you to continue making payments on the old loan. However, doing so will not initiate a transfer of the property into your name. Refinancing, on the other hand, will allow you to take title. Depending on the previous mortgage interest rate, it may save you money, as well. For example, let us say grandma’s original loan was a 30-year fixed-rate mortgage at 6 percent for $200,000. If you just continue making payments, your obligation is $1,199.10 in principal and interest every month until the $100,000 balance is satisfied. However, you could refinance that $100,000 into a 15-year fixed rate loan at 3 percent, reducing the payment to $690.58. In the process, you are able to take title.

SEE ALSO: Choose the Right Mortgage: DINKS (Double Income No Kids)

Refinancing With Multiple Heirs

Maybe you are not grandma’s sole heir. If you inherit her property with brothers, sisters, or cousins, things become more complicated. If you want to retain the home yourself, you will need to refinance, and use the proceeds to buy out the others. Technically, this requires a refinance and a purchase transaction. However, because you share in the ownership, you can use your portion of the proceeds as your down payment, eliminating the need to put cash down at closing. For example, let us say you have inherited grandma’s home with your two siblings. Neither has an interest in taking title; they just want the cash value of their inheritance. As you may recall, the property is currently worth $250,000. Were you to sell it for $250,000 and use $100,000 of the proceeds to pay off thecurrent mortgage, you would each inherit $50,000. Instead, you can refinance the loan for $250,000, and pay off the $100,000 mortgage balance. With the remaining $150,000, you would use your $50,000 in equity as a down payment, and distribute the remaining $100,000 to your siblings ($50,000 each). You now have title to grandma’s home and a mortgage for $200,000. Property inheritance can be complicated, so consult an attorney who handles residential real estate matters before you take action. 

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