Inheriting a property can feel like a major windfall, offering opportunities you may never have imagined. However, this inheritance might come with unexpected challenges, especially when it comes to the financial responsibilities attached to it. Whether it’s a house that requires extensive renovations or a property that’s already carrying debt, understanding your options is key. For many, a home equity loan can provide the necessary funds to make improvements or address other financial obligations.
But what happens if you inherit a property? How do home equity loans work on inherited homes? Let’s break it all down.
Understanding Inherited Properties
When you inherit a property, it’s important to understand what that means financially. The process can vary based on how you inherit the home, whether you’re the sole heir or share it with others, and the financial obligations that come with it.
What Is Inherited Property?
Inherited property refers to real estate passed down to you when the property owner dies. The inheritance process depends on the ownership structure and whether the deceased had a will. For example, if you shared joint tenancy with the deceased, you automatically become the sole owner upon their passing. Alternatively, if you were named in their will or are a legal beneficiary under state laws, the property would be passed to you.
Inheriting a property alone is usually straightforward. You just need to change the deed into your name, and you’re officially the owner. However, if you inherit the property with others—such as siblings or co-beneficiaries—the process becomes more complex and may require additional steps to divide the ownership or decide on what to do with the home.
Common Financial Obligations of Inherited Homes
If the home you inherit has a mortgage, you’ll need to take over the loan or find a way to handle it. Data from the U.S. Census Bureau shows that more than 60% of homes have mortgages, which means that your inherited property could have one too.
Along with the mortgage, there are other financial obligations, including property taxes, utilities, and maintenance. If the house requires repairs before you can move in or sell, the cost of those renovations will also fall on your shoulders.
This is where a home equity loan can come in handy—allowing you to borrow against the property’s existing equity to pay for repairs or other expenses.
Can You Get a Home Equity Loan on an Inherited Property?
Yes, you can get a home equity loan on an inherited property. Once the property is officially in your name, you essentially own it just like any other homeowner. You’ll be able to apply for a home equity loan, provided you meet the standard qualifications, such as having good credit, income, and a favorable loan-to-value ratio.
Steps for Getting a Home Equity Loan on an Inherited Home
- Make Sure the Property Is in Your Name: The first step to applying for a home equity loan is ensuring the property is legally yours. This typically means transferring the deed into your name, which should be done once the probate process (if applicable) is complete.
- Meet the Qualifications: As with any home equity loan, you’ll need to meet certain criteria, such as having a stable income, a reasonable debt-to-income ratio, and sufficient equity in the home.
- Assess the Property’s Condition and Value: The amount you can borrow is determined in part by the home’s value and the amount of equity you have. Make sure to assess the property’s current condition, especially if you’re planning to use the loan for repairs. It might be wise to get an estimate from a contractor to ensure you borrow enough for any planned improvements.
- Review Your Financial Situation: Lenders will look at your current financial obligations, including any existing debts. Be prepared to show them your debt-to-income ratio, which helps them assess your ability to repay the loan.
Using a Home Equity Loan on an Inherited Property
A home equity loan allows you to tap into the equity in your inherited home to fund a variety of needs, such as home repairs, debt consolidation, or even personal expenses. The flexibility of home equity loans is one of their key benefits—they can be used for almost anything.
Here’s how you might use a home equity loan on your inherited home:
- Make Improvements: If the property needs significant repairs before you can move in or sell, a home equity loan can help cover the costs.
- Debt Consolidation: If you’ve inherited other debts along with the home, a home equity loan could help consolidate them into a more manageable monthly payment.
- Personal Expenses: If you need funds for anything else, a home equity loan can provide the cash you need.
What If the Inherited Home Has an Existing Home Equity Loan?
Sometimes, you may inherit a property that already has an outstanding home equity loan. In this case, you’ll still need to handle the loan, but you have several options available:
- Continue Making Payments: If the home equity loan has favorable terms, you can simply assume the payments and continue on as the new owner. This can be a good option if you plan to keep the home and the loan terms are manageable.
- Refinance the Mortgage: Another option is to refinance the home, combining the existing mortgage and home equity loan into one new loan. A cash-out refinance could also allow you to take out some extra cash if there’s enough equity.
- Sell the Home: If you plan to sell the inherited property, you can pay off the home equity loan with the proceeds from the sale. Just remember that you’ll need to continue making the loan payments until the sale goes through.
- Apply for a New Home Equity Loan: If the existing home equity loan has high interest rates or monthly payments, you might want to apply for a new home equity loan to replace it, essentially refinancing the debt into a more affordable loan.
Final Thoughts
Inheriting a property is a significant financial event, and understanding your options can make all the difference. Whether you want to renovate, consolidate debt, or simply manage the home’s existing obligations, a home equity loan can provide the flexibility you need. Just make sure to consider the property’s value, condition, and your overall financial situation before moving forward.
If you’ve inherited a home or are expecting to, let Avanti Way Financial help you navigate your options and determine the best financial strategies for your future. Reach out today to learn more about how we can assist with your home financing needs!
