Death, Debt, and Divorce: How to Get The Most From Your Mortgage Loan Officer

Mortgages are complicated—which is one of the reasons I like them so much. Each transaction is a little different from the last, and each one involves working with different personalities, different credit scores, different spending limits, and a different home.?

All of these variables can grow even more complex by some of life’s most tragic events: death, debt, and divorce. As difficult as these are on their own, they can often spark the need for a mortgage.?

When you’re dealing with the emotional pit of losing a loved one, the turmoil of nearing bankruptcy, or the devastation of divorce, it helps to understand the financial intricacies linked to your home.?

Here’s what you should know about death, debt, and divorce when it comes to mortgages.

Death And Mortgages

Here’s a quick snapshot of the US housing market: The average home in the US is valued at around $308,000. Home values have increased a whopping 18.4% over the last year, and Zillow predicts they’ll rise another 15.4% over the next year.

Why does that matter?

Well, if a family member passes away and leaves you their home, you could be on the hook for paying it off.?

In fact, depending on which state you live in and your relationship to the deceased, you could be responsible for paying:

• Inheritance tax (up to 15% of the home’s value in Pennsylvania!)
• Mortgage payments
• Insurance payments
• Utility payments
• Property taxes
• And more!

If you’re already paying a monthly mortgage payment on your own house, an extra one could feel downright unfair.?

That’s why I always recommend exploring a Gift of Equity—a powerful way of transferring property without significantly financially harming the recipient.?

Here’s how the Gift of Equity works:

Let’s say your parents are retiring and moving down to Florida—or your last living parent has only a few months to live and is getting her affairs in order.?

Regardless of the situation, your parents have a home worth $308,000. Instead of putting it on the market and trying to make $308,000 off the transaction, they could sell it to you for $108,000—allowing you to take out a significantly smaller mortgage before buying the house.?

But because you’ve only paid $108,000, you’d have an additional $200,000 in equity in the home immediately after the sale.?

That’s the gift of equity.?

While this is a powerful financial strategy, it’s worth noting again that this transaction requires planning. You can’t tap into it after the homeowner has already passed away.?

Pro tip: For legal concerns surrounding real estate, I always recommend Al Caruso of Oxford Settlement Services.?

Debt And Mortgages

Did you know you can use a mortgage to erase significant amounts of debt??

Here’s some background: According to the Federal Reserve, the average credit card interest rate in 2021 was 15.91%. And according to the Federal Reserve's Survey of Consumer Finances, the average US family holds $6,720 in credit card debt!

This is bad news for consumers, as higher credit scores unlock lower interest rates, which means you can improve your options when buying a home just by being a responsible consumer.?

But there’s some good news. If you’re struggling to keep up with 15.91% interest rates or with $6,720 in credit card debt, you can use your home as a tool to completely erase the debt.?

By refinancing your home, you can access additional cash that you can use to pay off your credit card once and for all. Plus, your refinance interest rate will likely be significantly less than 15.91%!?

As an added benefit, eliminating all of that credit card debt immediately boosts your credit score, which could also improve your mortgage rates the next time you buy a house.?

Pro tip: For accounting and tax issues related to real estate, I refer people to Frank Sekely of Sekely Accounting & Tax Service.

Divorce And Mortgages

Divorces are complicated enough, but finances make them even more complicated. During the Marital Settlement Agreement, spouses will go through a separation of property, which is when they decide on child support payments, alimony, vehicles, custody, and, of course, the home.?

If the couple doesn’t decide to sell the house, a refinance is likely necessary as one person will move out.?

In this case, the couple should complete a “quitclaim,” which removes the former spouse who’s moving out from the mortgage payments.?

At the same time, divorce is an opportunity for the spouse who’s moving out to receive equity for the portion they’ve paid into the home, using either an Asset Distribution or a Cash-Out Refinance.?

Bottom line: Divorces can get messy, but understanding your options surrounding your mortgage can help you remain fair and civil.?

Pro tip: If you are divorcing or navigating its legal challenges, I recommend Mike Antol of Antol & Stokes. Call 724-933-9080.?

Support Through Life’s Toughest Moments

If you or someone you know is currently facing the complexities of a mortgage during a death, debt, or divorce, contact me! You can reach me at [email protected] or call 484-788-1558.