What Happens to a Mortgage When Its Holder Dies?

The value of a modern mortgage can be staggering. Depending upon the cost of the property for which the loan was obtained, the value of an individual mortgage can easily exceed $100,000. The value of some "jumbo" mortgages can approach $1 million. When a mortgage holder dies with a portion of his or her loan outstanding, the bank that underwrote the credit facility must ensure that it's repaid in a timely fashion or risk taking an enormous financial hit. If you're worried about becoming financially responsible for a loved one's mortgage payments, you'll want to keep a few things in mind.

It's important to note that this situation occurs relatively infrequently. This is because most mortgages come with 30-year repayment terms. While three decades sounds like a long time, remember that most mortgage holders take out their loans when they're relatively young. A 30-year-old who takes out a 30-year mortgage will have the obligation paid off by his or her 60th birthday. According to recently-compiled life expectancy statistics, this is at least 20 years shy of the age at which a healthy American homeowner becomes likely to pass away.

Of course, not every home buyer is only 30 years old. However, older home buyers tend to have greater reserves of savings with which to finance their purchases. A 50-year-old house hunter at the height of his or her career is far more likely to be able to afford a home than a 30-year-old at the bottom of the corporate food chain. As a result of this simple but powerful dynamic, it's relatively rare for a homeowner to die with a significant portion of his or her mortgage outstanding.

When a homeowner dies with a balance remaining on his or her mortgage, the mortgage becomes a liability on his or her estate. If the homeowner carried a valid life insurance policy, the policy's death benefits may be sufficient to offset the remaining mortgage balance and pay off its underwriter. In fact, many supplemental life insurance policies contain specific provisions that provide guaranteed mortgage payoffs regardless of the amount of money required to settle the debt.

In the absence of a life insurance policy capable of offsetting the mortgage's outstanding balance, it's likely that the mortgage lender will foreclose on the property. Once this has been done, the lender will sell the house and use the proceeds to settle the loan's balance for good.

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