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Inherited Property: How To Refinance To Buy Out Heirs

TLDR

What You Need To Know

  • If you aren’t the only person inheriting a property but want to take control of it, you may be able to borrow against the home’s equity to buy out the other heirs
  • If there’s a mortgage on the property, it’s helpful to know how much home equity is available, if there are any debts or a reverse mortgage on it
  • When you inherit a home, you can assume the existing mortgage rather than refinancing and starting from scratch

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When you inherit a home or other property, you have a lot of decisions to make. Maybe you’re thinking about moving in, selling the property or converting the home into an investment property.

It’s important to remember that when you inherit a home, you inherit the home’s value and any debts or legal claims connected to the home. Things might get more complicated if you’re not the only person inheriting the home. Everyone will have to agree on how to share the home’s value – and responsibilities.

To help you get started, here are some questions you should ask yourself when you’re trying to decide what to do with an inherited home or property.

Questions To Ask Before You Inherit

Before you begin the process of buying out other heirs, ask yourself a few questions before you even inherit the home or property. You’ll want to know the true value of the home, any debt you might be inheriting and which professionals you’ll need to work with.

What is the available equity in the home?

Your home’s equity is the difference between the home’s current value and its outstanding mortgage debt.

If you inherit the home and there’s no mortgage debt, you should have 100% equity in the home. If there’s a balance on the mortgage, the amount of available equity may influence the choices you make.

Let’s say you inherit a home worth $300,000, but there’s an existing mortgage balance of $50,000. That would leave you with $250,000 in home equity. 

That equity represents the potential profit you could make from selling the home and what you’d have to divide between all heirs. You could also borrow against the available equity to buy out the other heirs.

Are there any liens or outstanding debts?

Before you inherit the home or property, you may need to settle any outstanding debts or liens on the property. 

Debts can include any kind of secured loan that used the home as collateral, like a home equity loan or home equity line of credit (HELOC)

Liens can include legal claims on the property, like unpaid property taxes or income taxes, missed child support payments or a claim from a contractor who wasn’t paid for work on the home. 

Is there a reverse mortgage?

If there’s a reverse mortgage loan on the home or property, it means the lender agreed to let the previous owner borrow against the existing equity in the home in exchange for a lump-sum payment, monthly payments or a line of credit. 

With a reverse mortgage, either the lender gets the property or the loan is repaid from the sale of the property after the owner dies or moves out.

In most cases, you’ll need to refinance or sell the property to pay off the balance of the loan or let the lender foreclose and take possession of the home. This may mean less equity is available to buy out other heirs.

Can you assume the mortgage? 

In the case of inheritances, if the mortgage on the home is a conventional mortgage or government-backed mortgage, you should be able to assume the mortgage and continue paying on the mortgage balance to take advantage of the existing equity. 

Assuming a mortgage is a lot easier if your name is on the mortgage or you’re a co-signer or co-borrower, but it’s not required.

If you assume the mortgage, you’ll be responsible for making any payments on the existing mortgage while the details of ownership and inheritance are being worked out. 

If you can’t afford the mortgage payments, talk to the lender about getting a loan modification. The lender may be willing to lower the monthly mortgage payment, adjust the interest rate or extend the length of loan repayment.

Is there an executor?

Before you inherit the home or property, you’ll need to work with the executor of the estate. If you aren’t the executor, it will be someone with the legal authority to manage the distribution of the home and the rest of the estate. 

Executors are responsible for settling or disputing liens and debts, making sure that everyone gets what they’re entitled to under the will and approving any decisions about ownership and compensation if there are several heirs.

An heir can be named as the executor. It could also be a bank or trust company. If an executor wasn’t named in the will, your state’s probate court will appoint someone. Usually, surviving spouses get priority, followed by any adult children, but it can vary from state to state.

How To Refinance To Buy an Heir Out of an Inherited House

If you are the sole inheritor of a property and there are no other legal claims on the home, the property is yours. You can live in it, borrow against it, sell it or use it however you wish.

If there are other beneficiaries, you can try to come to a mutual agreement on managing the property. You can agree to either sell the property or turn it into an investment property, splitting the proceeds and responsibilities. 

If you want to keep the home for yourself, you may need to buy everyone out. You won’t have to tap into your savings to do it. There are options available that will allow you to borrow against all or part of your future inheritance. 

Buying out other heirs with a cash-out refinance

If the home has enough equity in it, you can borrow more than the value of the home and keep whatever’s left over after you pay off the existing mortgage. 

One of the key benefits of a cash-out refi is that you can borrow money at mortgage interest rates that are usually lower than credit cards, personal loans and even home equity loans.

Let’s say you and a sibling inherit a home worth $300,000 with a $50,000 mortgage balance. You want to keep the home, but your sibling wants the cash and agrees to settle for $125,000.

You could refinance the mortgage for $200,000, use $50,000 to pay off the existing mortgage, pay your sibling $125,000 and keep the remaining $25,000 for yourself. After paying your sibling and keeping the $25,000, you’d still be left with $100,000 in home equity. 

You’d be responsible for paying off the new $200,000 mortgage, but the house would be yours.

Take out a home equity loan or home equity line of credit (HELOC)

Let’s say you inherit a home and you don’t want to sell or refinance, but you need money to buy out another heir. If there’s enough equity in the home, you can take out a home equity loan or home equity line of credit (HELOC). 

Either option lets you borrow against the value of the home without having to take out a new mortgage on the home. There is one limit you should keep in mind. Most lenders will only allow you to borrow against 75% – 80% of the home’s value.

And, if you were hoping to take advantage of the mortgage interest tax deduction, you may be out of luck. You can only deduct mortgage interest from your income taxes if you use a home equity loan to build, buy or repair your home.[2]

What if I Don’t Want To Keep the Home?

There may be times when it makes more sense to let an inheritance go. 

If the home is underwater (think: the home is worth less than what’s owed on the mortgage), you may choose to let the home go into foreclosure. The lender would take control of the property. You wouldn’t see any profit from its sale, but you wouldn’t be responsible for any remaining mortgage debt. 

Beware: Mortgage debt is different from property taxes or other non-mortgage debts. You’d still be on the hook for those. If you’re considering foreclosure for an inherited property, make sure you understand what you will and won’t be responsible for. You’ll also have to get any decisions you make cleared by the executor and any other heirs.

Making the Most of Your Inheritance

Inheriting a home or property comes with a lot of responsibilities. 

To get the most value out of your inheritance, talk to a lawyer, a financial advisor and a tax professional to make sure you’re meeting all the obligations that come with the property and that you’re putting the property to the best use possible for your future financial goals.

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  1. Consumer Financial Protection Bureau. “CFPB Clarifies Mortgage Lending Rules to Assist Surviving Family Members.” Retrieved November 2021 from https://www.consumerfinance.gov/about-us/newsroom/cfpb-clarifies-mortgage-lending-rules-to-assist-surviving-family-members/

  2. Internal Revenue Service. “Interest on Home Equity Loans Often Still Deductible Under New Law.” Retrieved November 2021 from https://www.irs.gov/newsroom/interest-on-home-equity-loans-often-still-deductible-under-new-law

ICYMI

In Case You Missed It

  1. The executor manages the distribution of the estate, settles disputes and pays off any outstanding debts

  2. If you take out a home equity loan or HELOC, you may not be able to borrow against the full value of the home

  3. If the property is underwater or has a reverse mortgage, you can allow the home to go into foreclosure

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