When a New Jersey homeowner dies with a mortgage, the loan remains tied to the property and must be paid by the estate or heirs. Estate planning with tools like a trust can simplify the process and protect your family.
When Rachel’s father passed away, she and her siblings inherited his New Jersey home through his will. The house still carried a $150,000 mortgage. Rachel assumed the bank would require them to pay off the loan immediately, but — luckily — that wasn’t the case.
Federal law protects heirs from a provision known as the “due-on-sale” clause, which typically allows the bank to demand repayment when home ownership changes. Under this law, because Rachel and her siblings inherited the property, they could keep making payments and not pay a lump sum.
A mortgage is a lien on a house, so whoever inherits the home also inherits the responsibility of keeping up with the mortgage payments to avoid foreclosure. While an estate is being settled, it is the estate executor’s responsibility to continue making mortgage payments (usually from estate funds). If there’s a will naming beneficiaries to the house, they can keep the mortgage and continue paying, refinance into their own names or sell the home and pay off the mortgage from the sale proceeds. If there’s no will, New Jersey’s intestacy laws decide who inherits the house, and the same mortgage rules apply.
After discussing their options, Rachel and her siblings decided to sell the home. At closing, the mortgage was paid off first, and the remaining proceeds were split among the heirs. This turned out to be the easiest solution for Rachel’s family, but others in her position might have chosen to move in and keep paying the loan.
Should You Put Your Home in a Trust?
Families can make this process smoother with estate planning. One common estate planning strategy for a home with a mortgage is to place the home in a revocable living trust. Here’s why:
- A trust allows the home to transfer directly to beneficiaries without probate and court involvement, which can save time and expense.
- A trust can provide clear directions about the deceased’s wishes for the property, including if a house should be kept or sold, reducing confusion for heirs.
- Because the transition is seamless, there’s less risk of missed mortgage payments during the probate process.
Of course, whether a trust is right for you depends on your family situation, the size of your estate and your long-term goals. Other planning tools, such as joint ownership or transfer-on-death designations, might also be worth considering.
If you have questions about how a mortgaged home would be handled in your estate plan — or whether creating a trust makes sense for your situation — it’s a good idea to speak with an experienced estate planning attorney. The right plan can help protect both your home and your family’s peace of mind. Contact the experienced estate planning attorneys at TREEL to learn more.
