Refinancing an Inherited Property: What You Need to Know

Did you inherit a house? The feeling can be amazing, but the financial decisions and responsibilities that come with it can quickly feel overwhelming, especially because the property was passed down to you by a loved one. Why not consider refinancing it? It could lower your monthly mortgage payments, or you could make necessary repairs with built-up equity.

Before you go ahead, here is everything you need to know about refinancing your inherited property.

Did You Inherit a House With a Mortgage?

It isn’t fortunate if you have inherited a house with a mortgage. A mortgage is a lien against the asset as security for the money borrowed to purchase it. The mortgage needs to be repaid—not paying could result in foreclosure.

If there is a co-signer or co-borrower on the loan, they are responsible for repaying it. Once you have been named the executor, you become responsible for handling any remaining financial obligations and ensuring beneficiaries receive their assets. You will continue making mortgage payments using funds from the estate.

If you are the sole heir of the property, you have several options:

• Assume the mortgage and continue making payments
• Clear the debt
• Sell the property
• Refinance

However, if you are one of the several heirs, all co-heirs should work with the estate executor and the mortgage lender to decide the property’s future. The mortgage may include a due-on-transfer or due-on-sale clause that needs full loan repayment before a change in ownership.

Lenders cannot enforce this clause in some scenarios, such as if the borrower dies and the property is passed to their children, the property is transferred to a living trust with the borrower being the trust’s beneficiary, or in case of legal separation like divorce.

What if You Inherited a House With No Mortgage?

Maybe you inherited a house with no mortgage. In that case, you own 100% of the property’s equity. While you can use that to your advantage, you need to contact a lender and meet their requirements for a new loan.

How to Refinance an Inherited House

An inherited property can be refinanced in different ways. When refinancing, you must continue making monthly mortgage payments. Here are some refinancing options:

Probate Loan

This loan is a cash advance provided by the lender while the estate undergoes probate. The lender will receive your inheritance after probate proceedings. To apply for a probate loan, you need:

• The requested amount and purpose
• Order for probate
• Inventory and property/appraisal address
• Petition for probate
• The death certificate

The lender will review your application after you submit it, and the cash can take up to two weeks to show in your bank account. You may take out a probate loan on the available equity in the home, which you can use to buy out other beneficiaries.

Rate-and-Term Refinance

This refinancing option allows homeowners to change the term and interest rate of the present loan by using a new mortgage to replace it. A rate-and-term refinance helps lower monthly payments or can be used to shorten the loan term without changing the principal balance. It is a good option for solo heirs to the inherited home, not properties with co-heirs.

The house and mortgage must be in your name before you start shopping for lenders. You can refinance once it is transferred to you.

These are the primary steps to rate-and-term refinance an inherited house:

1. Check credit score: You need a FICO score of at least 620 (varies for every lender).
2. Check multiple lenders: The best refinance rates and the lowest fees come from comparing different lenders.
3. Apply for a refinance: You can apply with several lenders. Your credit score will have minimal impact.
4. Compare Loan Estimate documents: Doing so will tell you how much you will need for closing costs.
5. Lock your interest rate: Your interest rate won’t change for some time once locked.
6. Close on your new loan: Closing on a refinance is like closing on a purchase loan. You have to pay closing costs.

Also Read: Are Property Taxes Included in Mortgage?

Cash-Out Refinance

This refinance option gives homeowners a new loan for more than what they owe. The difference is paid in cash, which can be used to improve the home, consolidate debt, or meet other financial obligations. You may also use it to purchase the inherited home and pay off the remaining heirs.

A cash-out refinance has a few requirements, including:

• It requires the homeowner to have at least 20% equity in the home.
• Your inherited home’s value determines the amount you can take out, which you will find out after a home appraisal. A lender should generally let you take out about 80% of the home’s value (depending on the lender and your situation).
• Your name must have been on the title of your inherited property for a minimum of 6 months before you can do this refinancing.

Conclusion

Now that you have a clear idea of how to refinance an inherited house, choose a reliable mortgage broker to help you and make the process seamless. Talk to the experts at ALT Financial.