What to do after inheriting a house with a mortgage

Inheriting a house can be a stressful experience, especially if it’s due to the loss of a loved one. If the property still has a mortgage, your typical options are to sell the home and pay off the loan or keep the home, which involves taking on the mortgage and continuing repayments. 

Any choice you make will come with some pros and cons, so it’s helpful to carefully weigh the possibilities. Whatever you do, you'll want to avoid adding unnecessary complications during this time. 

Knowing what happens after inheriting a house with a mortgage can help you take the right steps forward, keep the process as simple as possible, and protect your finances.

Options when you inherit a house with a mortgage

First, it’s important to know whether you are the sole heir or if there are multiple heirs involved. If you inherited the property alone, you should have complete control over its future. However, if the home has more than one heir, you'll need to discuss each person's plans for the house and come to an agreement.

Your options after inheriting a house with a mortgage include:

• Selling the home: You could pay off the mortgage with proceeds from the sale and keep any remaining funds. You might go down this route if you can't afford the house or you don't want to live in it or rent it. Keep in mind that selling a home can sometimes add extra strain when grieving a loved one. You may also owe taxes on any money you receive from the sale. 
• Keeping the home: Alternatively, you can keep the property, which involves assuming the mortgage and making the monthly loan repayments, if any. Keeping your inherited home could be the right choice if you want to live in it, it holds sentimental value, or it might appreciate over time. That said, you might need to spend money on repairs, taxes, and insurance.
• Renting the home: If you decide to keep the home, you could rent it out for additional income, which might cover the cost of the property's mortgage. 

Steps to take after inheriting a mortgaged house

Inheriting a home with a mortgage can be a complicated process, so it’s important to be aware of what’s usually involved. Keep these steps in mind as you move forward.

Contact the mortgage servicer

Contact the servicer handling the deceased's home loan and notify them of the death. They will most likely require a copy of the will and death certificate before telling you how much remains on the mortgage and the monthly payment amount. 

You'll likely need to keep making mortgage payments on the home to avoid penalties or risk foreclosure while you work out what to do next.  

Calculate the home's worth and equity

Knowing how much your inherited home is worth can help you figure out next steps. The best way to do this is to get a home appraisal, which determines the property's current market value based on its location, condition, and other factors. 

Once you have a  home value from an appraiser, subtract the mortgage amount from the home's market value. This will tell you the home’s equity or how much you could receive from a sale. Of course, it’s also important to consider any additional expenses involved in selling the home, such as making repairs and closing costs. 

Know your tax obligations

You’ll most likely need to pay taxes whether you decide to keep or sell the house. Plan to pay property taxes if you keep it (these may be rolled into monthly mortgage payments) and capital gains taxes if you sell it at a profit (unless you're eligible for an exemption). A tax provision called step-up in basis considers the property's fair market value at the time of the owner’s death instead of when the deceased purchased it, potentially lowering your capital gains tax liability.

Determine your costs

What you do with your inherited property might depend on your overall costs. For example, selling the home can incur various fees, such as closing costs and real estate commissions. You may also need to repair or upgrade the property before it goes up for sale. 

Keeping the home also involves spending money. As well as mortgage repayments, you'll need to consider property taxes, home insurance, general upkeep, and other expenses. 

Consider getting help from an attorney

Hiring an attorney specializing in inheritance, probate, and estates might be useful when dealing with an inherited property. The right professional can help you contact the mortgage servicer, assume the loan, work out any tax liabilities, and navigate any other issues that may come up.

Refinancing an inherited home with a mortgage

Refinancing the loan might make sense if you can lower your monthly payments and interest rate. You might also want to consider refinancing your inherited property for the following reasons:

Pay off a reverse mortgage

A reverse mortgage is a special loan for people 62 and older who want to borrow against their home's equity. If your inherited property has this type of mortgage, you could refinance it into a traditional loan and use your new mortgage to pay off the balance.

Buy out other heirs

Refinancing an inherited property to buy out heirs may be a good option if you want full ownership of the home or want to prevent a forced sale. The process can involve inspecting the estate plan, discussing your plans with other heirs, reviewing any due-on-sale clauses on the loan, transferring the mortgage deed to your name, and applying for the right refinancing product.

Make repairs and renovations

Whether you want to update your inherited home or make some repairs, refinancing can provide you with the necessary funds. For example, you can remodel the kitchen or bathroom or extend the property by adding extra rooms. Any changes you make to the home might increase its value if you decide to sell it in the future.

Refinancing may help you fund some of these upgrades. A cash out refinance, for example, lets you borrow a lump sum against any existing equity in your inherited home. It replaces the current mortgage with a bigger loan, which you'll repay in monthly installments. 

Refinancing inherited property can be complex. Keep in mind that most traditional lenders won't approve a refinance until your name is on the mortgage deed.

FAQs

What can you do if you inherit a house with a mortgage?

You could keep the home and move in, rent it, refinance it, or sell it. Your options may depend on whether you are the sole heir, your financial obligations, and goals.

Is refinancing an inherited house with a mortgage worth it?

A refinance might help make your monthly payments more affordable, pay off a reverse mortgage, buy out heirs, or repair and renovate the property.

What happens if an inherited property with a mortgage has multiple heirs?

When more than one heir inherits a property with a mortgage, each person owns a portion of the home. Discuss your goals for the house with other heirs to avoid disputes and complications. 

Next steps to take after inheriting a house with a mortgage