Inheriting a house with siblings may seem like a blessing, but it can quickly lead to financial and emotional stress. Unless the will indicates otherwise, inheriting a house with siblings means that each person owns an equal share of the property. If the other heirs want a payout, however, it could be a good idea to refinance an inherited property.
While you and your siblings can continue to share ownership of the inherited house, refinancing is another option worth considering.
Follow this guide on how to refinance an inherited property to buy out heirs.
After inheriting a house with siblings, you each have rights to that property.
Let’s say that there are three heirs. Each has a one-third interest in the inherited property but all have the right to use the property in its entirety.
The heirs can also decide to sell the home and divide the proceeds among themselves. Alternatively, they can buy out each other’s shares to build a greater amount of interest in the inherited property.
If you inherit a house with no mortgage, congratulations! You’re free and clear. You and the other heirs (if any) have 100 percent equity in the inherited home.
While you may not need to make mortgage payments, there are still other financial considerations.
You are still required to pay property taxes and if you plan to refinance the inherited property, you will need to make any necessary home repairs and purchase homeowners insurance.
Things get a little more complicated when you inherit a house with a mortgage. A mortgage is a lien against the inherited property. Heirs are still expected to continue making mortgage payments or risk foreclosure.
Your right to the property also depends on whether you were named the executor of estate or are just an heir. But what’s the difference?
An executor of estate’s job is to carry out the wishes of the deceased based on what was written in the will. Assets are divided and distributed to the heirs. The executor of the estate may also decide to put the mortgage in their name as long as they are financially capable and creditworthy.
If you are just an heir, then you are legally entitled to inherit part of the estate but have no control over how your percentage is paid out. When there’s no executor of estate, the heirs must decide how to manage the inherited property.
The mortgage lender may also have a due-on-sale clause, which requires full repayment if there’s a change in ownership of the inherited property. However, this clause doesn’t apply if the heirs are immediate family members of the borrower.
Calculate how refinancing might affect your monthly payments with Total Mortgage’s Refinance Calculator and see how much you can save.
Buying out heirs through a refinance can be tricky, but you generally have two options: an estate loan or a cash-out refinance.
An estate loan or probate loan is much like a home equity loan where you can borrow against the value of the estate. Estate loans are commonly used when one heir wishes to keep the inherited property while the others prefer a cash payout.
The lender provides you with a cash advance while the estate is going through probate. Once probate events end, the inheritance goes to the probate lender. You can also take out a probate loan based on the available equity in the inherited property, which can then be used to buy out heirs.
When applying for a loan, make sure you have these key items:
A cash-out refinance is a type of mortgage refinance that takes advantage of the built-up equity in the inherited home.
The process is similar to a typical rate-and-term refinance where you replace the existing loan with a new mortgage. However, a cash-out refinance allows borrowers to withdraw part of the home’s equity in a lump sum. This can be used to purchase the home and buy out the other heirs.
To use a cash-out refinance to buy out heirs, lenders will require a minimum amount of equity in the inherited property, typically 20 percent.
Here’s a step-by-step guide on how to refinance an inherited property to buy out heirs.
1. Review the estate plan: Before starting the refinancing process, review the will to determine how much each heir should receive from the estate.
2. Discuss transfer and refinance options: Each heir must agree to transfer rights in exchange for a buyout. In the event that an heir doesn’t agree and there’s a dispute, legal action can be taken to force the sale of the property. If all heirs agree to transfer rights, then you must determine the property value and buyout amounts.
3. Assume the mortgage: Contact the mortgage lender to see if you can add your name to the loan and continue making mortgage payments.
4. Choose a mortgage lender: Get a refinance quote from a lender and secure an ideal interest rate.
5. Complete the refinance on your inherited property: Once you find the right lender, you can apply for a refinance on your inherited property. Make sure you can cover closing costs.
6. Pay the other heirs: Use the lump sum payment from the cash-out refinance to pay the other heirs. The inherited property and all the financial obligations that come with homeownership are now your responsibility.
Refinancing an inherited property to buy out heirs can be tricky. If you find yourself in this situation, it’s important to make a decision quickly and begin the process as soon as possible.
When you’re ready to take the first step, consider refinancing with Total Mortgage. Start by finding a Total Mortgage branch near you or apply online and get a free rate quote.