I’ll Leave My Deed to My Adult Child. What About My Low-Interest Mortgage?

You hold a deed. You wrote a will. You left your home in the will to your adult child. You’re feeling pretty good about your simple, straightforward estate plan. The only thing you’re wondering about is the mortgage.

You could try to pay off the balance, but should you? You have a very low interest rate. So, rather than putting your money into a final payoff, you’d rather keep the funds in investment accounts.

If you pass away with the mortgage still on the home, will your named beneficiary get a chance to keep your very attractive mortgage loan in place?

Your Adult Child Can Inherit Your Home—With Your Mortgage  

Many parents decide to bequeath their deeds through a will or trust because doing this provides tax benefits. Heirs receive a step-up in cost basis, which means their capital gains tax can be significantly reduced if they decide to sell the home.

If you have questions about how your child’s situation will be handled by the mortgage company, it’s a good idea to call the company and get answers. Just know that under federal law, your adult child can have the home and also continue paying your mortgage.

Your child needs to know that the mortgage won’t be forgiven just because you have passed. But if you have a nice, low interest rate, your child gets to keep that rate. It will not be marked up to the prevailing rate at the time of your passing.

This is because your adult child is recognized as a successor in interest to the loan.

This is not the same thing as assuming the loan. If your child wants to assume the loan, that’s a matter for discussion with the bank.

Reverse mortgages are different. They come due at the borrower’s death. If you take out a reverse mortgage, prepare your beneficiary for the reality that they’ll need to resolve your loan—normally within six months to one year.

Tell Your Child About the Law That Lets Your Loan Live On—After You’re No Longer Here to Repay It

Lenders include a due-on-sale clause in their home loans. Once the name on the title changes, the mortgage lender can demand full repayment. But there are safeguards in place for relatives when a mortgage borrower dies. If the title transfers to a beneficiary, the lender is required to communicate with that person. In fact, a 1982 law called the Garn-St. Germain Depository Institutions Act directs your mortgage lender to leave the loan intact if your immediate family member will get the home when you pass away.

Let your beneficiary know that the loan servicer will promptly need a copy of the death certificate (and possibly your will or the probate court’s order).

Your adult child should:

• Read the state law on successors in interest, and speak to a trusted estate attorney for guidance.

• Act promptly to claim successor-in-interest status and begin making payments as soon as possible.

• Request a printed confirmation of their successor-in-interest status.

• Be sure the estate is faithfully keeping the insurance and taxes up to date.  

• Involve an estate attorney if there are multiple beneficiaries.

• Treat a mortgage rate as an asset—one likely to be lost if the beneficiaries sell, refinance, or buy each other out.

Remember, the underwriter vetted you, not your child. Lenders have no incentive to try to keep a loan alive with a very low interest rate. Prepare your adult child to understand and guard their best interests.