A mortgage doesn't die with the borrower.
When a borrower dies without having paid off his mortgage, the lender still expects payment on the loan. Depending on the particular situation, the lender may demand the payment from the borrower's remaining assets or the successor owner of the property. Getting insurance may provide the borrower's heirs some protection from the lender.
Estate
If the borrower's estate pays the mortgage, it means that the lender obtains the loan payment from the borrower's assets, such as cash or bank accounts. If the borrower's assets can cover the mortgage, the borrower's heirs receive the remainder of the borrower's estate. If the borrower's assets can't cover the mortgage, the lender can't demand payment on the debt. However, the lender may go after other parties who signed the mortgage loan with the deceased borrower.
Successor
The lender may demand payment from the person appointed by the deceased borrower as the successor owner of the property. If the successor owner also receives the deceased's estate, he can use the deceased's assets to pay the mortgage. Otherwise, the recipient of the estate may have to pay the mortgage. To prevent conflict between the successor owner and the recipient of the estate, the borrower can make it a requirement that the successor owner agrees to assume the mortgage if he wants the property.
Life Insurance
If the deceased has life insurance, his heirs may be able to claim an amount of money that can help pay the mortgage. If the amount of life insurance is large enough to cover the debt, this effectively protects the borrower's other assets from the lender so that his heirs can enjoy these assets. The beneficiary of the life insurance receives the amount tax-free. The borrower can also arrange for the life insurance to cover any estate taxes.
Mortgage Life Insurance
The borrower can also obtain mortgage life insurance to cover the loan in case he dies or becomes disabled. Mortgage life insurance provides enough payment to the lender to cover the mortgage. The beneficiary of a mortgage life insurance is usually the lender, so the borrower's heirs can't decide to use the funds for other purposes. Qualifying for a mortgage life insurance is usually easier because the borrower doesn't require a physical examination.
Tags: life insurance, successor owner, borrower assets, borrower heirs, cover mortgage, demand payment