Nov 10, 2024
You’ve just inherited your great uncle’s $1.3 million house — a dream come true, right? But there’s a huge catch: This gift comes saddled with a home equity line of credit and there’s no cash left to pay it down.
Now, you’re on the hook for someone else’s debt, and the clock is ticking. What’s your move?
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Lottery winnings, capital gains, inheritances — the list of unexpected windfalls that carry hidden costs is long and proof that nothing is free. Let’s say you inherit a relative’s seven-digit home, only to find the expensive surprise of a home loan debt that must be repaid before the house is yours.
Understanding probate: What’s at stake?
Before tackling the home equity line of credit (HELOC), it’s essential to understand probate.
Probate is a legal process that verifies the deceased’s will and oversees the transfer of assets. The estate’s debts — like mortgages, credit cards or a HELOC — are settled first, and the remaining assets go to the heirs. The inherited property may become part of the probate process since there were no other assets to cover the HELOC.
The probate court’s role varies by state, and so do the requirements. In some states, inheritors can bypass probate if the home is held in a trust, but if it’s not, you may need to go through probate to determine who gets what—and what’s owed.
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The HELOC dilemma: Your options explained
Inheriting a property with a large HELOC presents several choices. Here we explore the main options for handling the debt, which typically involve assuming the loan, refinancing or selling the property to pay off the debt and keep any remaining equity.
Option 1: Assume the HELOC
Assuming a loan means taking over the debt and making regular payments in place of the original borrower.
If you decide to keep the property, one option is to assume the HELOC, effectively transferring the loan into your name. However, this requires lender approval, as they will likely evaluate your financial situation before allowing the transfer. While assuming the loan allows you to keep the property, remember you’ll be responsible for regular payments.
This option can be beneficial if you plan to live in the home if it’s a good investment. However, if the HELOC balance is substantial, the payments may be challenging without sufficient income. It’s important to review the terms, as many HELOCs have variable interest rates, which could lead to higher payments over time.
Option 2: Refinance the loan
Refinancing means replacing the existing HELOC with a new loan, ideally with better terms.
Refinancing can simplify debt management by converting the HELOC into a fixed-rate mortgage or a new HELOC with more favorable terms. To qualify, you’ll need to meet the lender’s credit and income requirements. If approved, refinancing could lower your monthly payments and make the debt more manageable.
While refinancing may provide better terms and stable monthly payments with a fixed rate, it does involve closing costs, an appraisal and potentially higher interest if your credit score doesn’t qualify you for favorable terms.
Option 3: Sell the property to pay off the HELOC
Selling the property allows you to pay off the HELOC, eliminating ongoing debt obligations.
This is the best option if you’re unable to assume or refinance the debt. Once sold, the HELOC balance and any other property-related debts are settled from the sale proceeds. You’ll also receive any remaining equity as part of the inheritance.
However, if the home’s market value doesn’t cover the outstanding HELOC, you may face a shortfall and need to negotiate with the lender to forgive part of the debt.
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Chris Clark is a Kansas City–based freelance journalist covering personal finance, housing and retirement. A former Associated Press editor and reporter, he writes plainspoken stories that help readers make smarter financial decisions.
