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?
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.
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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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.
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.