Dear Big Move,
I own a home worth $400,000. I recently applied for a $100,000 loan against the property. I have never owned a mortgage on a home.
My loan term is 30 years, but I will be gone long before that. My interest rate is 6.6% and I pay approximately $672 per month. What will happen to the balance of the mortgage when I pass? I have willed the house to my grandchildren to be sold and the funds divided after I’m gone.
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Was taking out the loan a good or a bad move? I need the cash now. Please tell me how it could affect the value of the house in the future. I was in the process earlier of applying for a reverse mortgage and decided against that.
Concerned for My Family
Dear Concerned,
It’s very considerate of you to care about what happens to your debt after you are gone, and how that affects what happens with your house, especially since you have left it to your grandchildren. You obviously want to set them up for the brightest future possible.
The fact the house has a loan borrowed against it will not affect its value in the least. But after you die and your house passes on to your grandkids, they will be obligated to settle the debt. They can choose to resolve that by selling the house and using some of the proceeds to pay off the loan.
The loan you have taken out sounds akin to a home-equity loan. Your lender likely provided you with a lump sum and set up the payments of $672 that you must make on a monthly basis for a specific period.
Even if you don’t use the money for anything and it just sits in your bank account, you’re still on the hook to repay the debt on a certain payment schedule. Missing a payment could affect your credit score and lead to you owing more in interest. Clarify with your lender the consequences of not staying current on the $100,000 loan, and look over the documents you signed when you applied for it.
So what happens to the loan balance if you die before you finish paying it? That’s in the hands of your grandkids, whom you have designated as your heirs. They will be obligated to settle the remaining debt, whether they choose to keep the house or sell it. If they decide to keep it, they might be able to take over the monthly payments, but you should talk to your lender to see what the limitations are.
The bottom line: There will be enough time for your heirs to decide if they want to keep the property or sell it, says Phil Crescenzo Jr., vice president of the southeast division of Nation One Mortgage Corporation.
In some cases, such as with a reverse mortgage, the balance is due after a person dies, and their heirs receive a payable notice from the lender, according to the Consumer Financial Protection Bureau. The heirs then must decide if they want to sell the house or turn it over to the lender to satisfy the debt.
If you’ve got cold feet and want to get rid of the loan, talk to your lender to see if there are any prepayment penalties. Some lenders will charge penalties if you pay off a loan within the first three to five years of the repayment plan, according to Citizens Bank, and those penalties can be up to 2% of your loan balance. So beware of the risks if you choose this path.
In any case, Crescenzo says your decision to take on a second mortgage was a good move. You are tapping into your home equity to increase your cash flow now and “allowing a plan for the future that is clearly defined.”
But make sure that in the coming days, weeks, and months, you learn what exactly you borrowed and how you’ve signed up to pay it back. Always know what you have signed, whether you’re buying or selling a home, right down to the last cent.
As to the value of your house: The loan itself doesn’t affect the home’s value. That depends on the condition of the house and home-price trends in your area. The $100,000 loan only relates to the financing of the house and how much you owe on it.
But you do need to sort out what will happen with that loan balance in the coming years.
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