Losing a spouse is one of life’s greatest challenges. Whether it’s expected or sudden, one of the most trying aspects is having to deal almost immediately with household expenses and personal finances. The toll grief takes on your emotions can cloud judgement and turn even minor money decisions into overly strenuous events.
One of the most difficult questions you have to answer as a surviving spouse is if you wish to stay in the family home. If you and your spouse owned a mortgaged home, it is now your full responsibility to ensure payments are made per the loan agreement.
WHAT HAPPENS TO YOUR MORTGAGE AS A WIDOW?
Some homeowner insurance policies have a feature that pays off your mortgage balance if one of the owners passes away. If you have this type of policy, you do not have to worry. However, if that’s not the case, the mortgage will transfer to you.
If you are a co-signer, U.S. Federal Law does not permit banking institutions to demand the outstanding mortgage balance upon the death of your spouse. The originally agreed-upon terms remain the same, and you are expected to keep up the monthly payments as the property is now solely under your name. If you want to remain in the home, this protection can be both a blessing and a relief. For some, the question of whether to pay off the mortgage in full or keep making payments may now arise.
If your name was not on the mortgage, because you inherited the house from your spouse, you get the right to keep making payments and assume the loan under federal law. You also, under federal law as of April 19, 2018, have the right to get information about the loan and seek a loss mitigation (foreclosure avoidance) option, like a loan modification.
SHOULD I STAY OR SHOULD I GO?
If you plan to stay in the home, paying off the mortgage may seem appealing. However, if you are on a fixed income, this could leave you with less cash on hand than you’re comfortable with for things such as renovations, upkeep, and repairs required down the road. So, maintaining the mortgage is a viable solution.
1) Renewing or Refinancing
As you decide which route you’d like to take, you’ll want to speak with both your financial advisor and your mortgage lender. Your mortgage broker can tell you what is required of you in the way of paperwork, answer your questions, discuss your current terms, and outline some options for you to maintain the mortgage. They would be especially helpful if you weren’t an active participant in the initial deal and need to gather more information about payment, amortization, and so forth.
Some things you’ll want to discuss include:
- Are there any options to refinance?
- When is your mortgage up for renewal?
If your term is nearing the end, perhaps you can shop for a lower interest rate to refinance. This could help lower the monthly payment or allow you to take some additional cash out on the loan for any immediate needs you have to cover. This is where your financial advisor will be especially valuable. They can help you evaluate your current needs and weigh the consequences of potential actions with you.
2) Should You Pay Off the Mortgage?
While paying off the mortgage can provide peace of mind during this uncertain time, it’s not a good idea if doing so leaves the widow “house rich” and “cash poor.” It’s best to ensure there is ample cash flow for living expenses and home maintenance repairs over paying off the mortgage just for the sake of taking it off your plate.
However, if you have sufficient other assets available to pay off the mortgage and still have a robust emergency fund, it can be a reasonable idea. You can work with your advisor to run cash flow projections to see if this makes sense for you in the long-term.
Another reason to consider paying off the mortgage is if you are working with an adjustable-rate mortgage. Rather than wait for the rate to reset at a potentially higher level and incur refinancing costs at that time, you would pay off your mortgage in advance of that possibility.
It is also important to consider the tax consequences of paying off the mortgage. If you claim the standard deduction, then paying off the mortgage may make more sense from an income tax perspective.
3) Selling the Home
Of course, you can always put your house on the market and change residence if you feel that staying in the family home isn’t the right move for you and your family. However, keep in mind, that moving at such an already stressful time may be more than you bargain for in the beginning. You’ll likely have to set up another mortgage, pack the home and all the belongings you and your spouse owned together, and start fresh without the help of a spouse by your side. And, of course, there are financial costs to moving, as well. So it’s important to do the math to see if the pros outweigh the cons, both from a personal and financial perspective.
ON YOUR OWN, BUT NOT ALONE
Becoming a widow is far from easy. There is no way to look at this type of grief and imagine it would be. Widows often need a friend, a supporter, and a confidant with whom they can sift through all the pros and cons of their financial and emotional affairs, which will undoubtedly include keeping, selling, or refinancing their homes.
As Certified Financial Transitionists® at Northstar Financial Planning, we help our clients work through these tough questions as they relate to their comprehensive financial plan to make the most informed and supported decisions they can after the loss of a spouse. If you are recently widowed or expect to become so in the near future, we express our sincere condolences and hope you’ll contact us today to get the support you need to move forward with some confidence and peace of mind.