If you have inherited a home with a mortgageA Mortgage is a document granting a lien on a home in exchange for financing granted by a lender. The mortgage is the means by which the lender secures the loan and has the ability to foreclose on the home., and don’t know what to do, you have options. You can sell the home, rent it out or live in it.
Q: My mom and dad have refinanced their home with a 40-year mortgage. They are both 71 years old. Have you heard of this type mortgage? And if so, what am I in for when the day comes, assuming they do not live to the payoff of the loanA Loan is an amount of money that is lent to a borrower, who agrees to repay it plus interestInterest is money charged for the use of borrowed funds. Usually expressed as an interest rate, it is the percentage of the total loan charged annually for the use of the funds.. term, when they will be age 111?
A: It sounds as though you’re a little surprised that a mortgage lenderA Lender is a person, company, corporation, or entity that lends money for the purchase of real estate. would offer a 40-year loan term to borrowers who are in their 70s. That’s an example of age-blind lending, which is exactly what anti-discrimination laws in this country require.
Along the same vein, a lender cannot deny a loan to an otherwise qualified borrower who is pregnant or home on maternity or paternity leave.
If the lender had denied a loan to your parents simply because of how old they are, they would have grounds for an age discrimination lawsuit.
Now let’s turn to the mortgage itself. Lenders now offer a variety of loan terms, from 10 to 40 years in length. Where a 30-year mortgage allows homebuyers to manage their monthly mortgage payments with a fixed payment, and pay off their home debt over 30-years, a 10-year mortgage requires much higher monthly payments (with far less interest paid) but pays off the loan over ten years. With a 40-year loan, you pay very little principalPrincipal is the amount of money you borrow if you're getting a home loan. If you're buying a bond, the principal is the amount you're lending. Typically, you'll buy bonds with a face value of ,000. If you buy a ,000 bond, your principal is ,000. each month so your monthly mortgage payment is lower than with a 30-year loan, but the corollary is that the amount of interest paid over the life of the loan is far higher.
When you have a 40-year loan term, it will take your parents a long time to start significantly paying down the balance of the loan, because mortgage amortizationAmortization is a payment plan which enables the borrower to repay his debt gradually through monthly payments of principal and interest. Amortization tables allow you to see exactly how much you would pay each month in interest and how much you repay in principal, depending on the amount of money borrowed at a specific interest rate. schedules require borrowers to pay most of the interest in the early years of the loan.
If your parents took out a 40-year mortgage on their home on January 1, 2012 for $200,000 at 4 percent, it will be about 27 years before the loan balance is cut in half. With a 30-year amortization loan, it would take only 19 years to achieve the same result.
As you can see, you will likely inherit the property with a sizeable mortgage balance on it. If your parents live to be 90, and they started out with a loan balance of $200,000, the loan balance in 19 years will be around $178,000.
What are your options? Hopefully, the property is worth far more in 20 years than it is today, so there will be a comfortable amount of equityYour share of ownership in a company. Stockholders are often referred to as equity investors, because they invest in the equity of a company. in the property. You could sell the property and pay off the loan or the lender will allow you to continue to make the payments and will put the mortgage in your name, as the individual who inherits the property.
It’s likely that in 20 years, whatever interest rate your parents get on this loan will seem cheap by whatever is being offered at the time. You may decide to rent out the property and continue paying the mortgage, or you may decide to live there. Either way, be sure your parents continue to make their property taxProperty Tax is a tax levied by a county or local authority on the value of real estateReal Estate is land and anything permanently attached to it, such as buildings and improvements.. and insurance payments as well, so their ownershipOwnership is the absolute right to use, enjoy, and dispose of property. You own it! is protected.