How to Refinance an Inherited Property to Buy Out Heirs
If you are wondering how to refinance an inherited property to buy out heirs, we've got you covered! Read on to learn more.
If you’re fortunate enough to inherit a property from a loved one, you might have the opportunity to keep the home and continue to build new special moments. Receiving the gift of a treasured family home is also a way to carry on their memory.
In some cases, you might not be the sole heir. So, what happens if you’re inheriting a house with siblings but you’re the only heir who is interested in holding on to the property? In that case, you may be able to refinance the home and buy out the other heirs.
This multi-step process isn’t always easy. This handy guide will walk you through everything you need to know about how to refinance an inherited property to buy out heirs. We’ll also explain other options like our home buy-back program for keeping the home in your hands.
#1 Evaluate the Property’s Financial Situation
When you inherit a family home, it can be difficult to look past your memories and emotions. However, before you can make any critical decisions about what to do with the inherited house or property, you (and your co-heirs) need to look closely at the home’s financial situation.
Learn where the real property stands by gathering information about the following:
- Title liens – You won’t be able to refinance an inherited home unless the title is free from existing liens. Debts such as unpaid contractor fees, property taxes, and other judgments stay attached to a property even after the original owner has passed away. You’ll need to settle these debts and obtain a clear title before you can attempt to refinance the property.
- Property value – The property value must be assessed. This provides you and your co-heirs with needed information about the appraised value of the home and each person’s share. It will also determine the size of the refinanced loan.
- Necessary repairs – This one can be tough. Homes will be valued more highly when they’re in top shape. Furthermore, some lenders won’t approve loans for properties in need of significant repair. You and your co-heirs must determine which repairs to make and how much to invest in them. Remember, although you’re the one keeping the real estate or inherited house, everyone benefits from a higher valued home.
- Existing mortgages – What happens if you inherit a house with a mortgage? If the home still has an existing mortgage, that loan will need to be taken into consideration during the refinancing process. If there isn’t sufficient home equity, you may not be able to take out enough to pay multiple heirs. In addition, everyone will need to agree that the existing mortgage will be paid off during the refinance. If you’ve inherited a home with no mortgage, the process may be more straightforward.
You may want to make a detailed list of all of the property’s financial liabilities and have it on hand for the next step in the process.
#2 Communicate with Your Co-Heirs
Once you’ve given the property a financial check-up, all of the heirs should sit down and talk about the next steps. Doing this will help you answer the question “should I sell my inherited house or not?” All of you must be on the same page throughout the process so that there aren’t any hang-ups or hurt feelings down the line.
Some of the things you’ll need to make decisions about include:
- How much each share will be worth
- The amount of money you’ll need from a refinance
- When the refinance will be done
Setting these expectations early will make for a smoother buy-out process down the line. Remember, emotions can run high when navigating these situations. Always try to be patient and listen to what the other heirs are feeling. You want everyone to walk away satisfied with the outcome of the home refinance plan.
Convert your Home Equity to Cash
#3 Transfer the Deed to Your Name
Next, you’ll need to transfer the property deed to your name. This enables you to apply for a refinance loan. You have two options here:
- Wait for the will to go through probate and file the needed paperwork
- Contact the existing mortgage lender and have your name added to the property deed
Once your name is on the deed, you can begin to apply for refinancing loans.
#4 Proceed with the Refinancing Process
Borrowing against inherited property can be a little tricky. However, an experienced mortgage lender or financial advisor might be able to offer advice on which type of loan you can qualify for and how to apply. Some loan types that can be used to refinance an inherited property include:
- Estate loans
- Probate loans
- Irrevocable trust loans
- Estate inheritance loans
The one thing these loans have in common is that they’re all considered cash-out refinance loans. This means you receive the money you apply for from a lender. You then distribute the funds from that loan to your co-heirs. The person keeping the property (in this case, you) makes the payments on the loan and everyone else is free to use their portion of the proceeds as they choose.
Keep in mind that a cash-out refinance is not the same as a home equity loan on inherited property. A home equity loan is a secondary loan that you take in addition to your mortgage. A cash-out refinance takes the place of an existing mortgage and becomes the primary loan on the property.
Refinance Loan Considerations
When you search for the right refinance lender to match your needs, keep these crucial points in mind:
- Is your credit score high enough to qualify for favorable loan terms?
- How much money do you need to take out to pay your co-heirs?
- Which option offers the best interest rate?
- What closing fees are attached to the loan?
- How long will you have to pay back the money you borrow?
If your goal is to hang on to the home—even if it means taking on a new mortgage—you must secure the best terms possible. You should always compare a few different lenders to ensure that you walk away with the best deal.
#5 Pay Out The Other Heirs
Once the refinance is complete, it’s time to pay out your co-heirs.
You’re responsible for distributing the cash from the cash-out refinance to the others. Then, the hard work is done and you have your inherited property to enjoy.
Refinancing Advantages and Disadvantages
Weighing the advantages and disadvantages of refinancing an inherited home can be tough. Emotions and attachment to the home might get in the way of your thinking.
However, we’ve listed a few of the key pros and cons here to help you better understand if refinancing to buy out your co-heirs is the best option.
Benefits of an Inherited Home Refinance
First, let’s look at some of the benefits of being the heir who refinances and keeps the inherited property:
- Control over the financial terms – Since you’re the one applying for the new loan, you’ll have the flexibility to choose the most favorable option for your financial situation. You might even find that you qualify for better loan terms than those on the previous mortgage, which can save you money in the long run.
- A lasting memory – If you’ve fought to keep the home, you probably have some fond memories. When you buy out your co-heirs, the home is yours to do whatever you’d like with.
- Prevents future disputes – Finally, taking care of a buyout now prevents squabbles over property ownership and finances in the future. You don’t want to fight with your siblings or other relatives about money, and distributing the equity from a shared property now can save you from those arguments later.
Downsides to Refinancing an Inherited Home
There are also downsides to refinancing an inherited home. Some of the risks may include the following:
- Higher payments – If you keep making parents on the deceased’s existing mortgage, the terms of that loan won’t change. However, when you refinance, you get a whole new loan. If you don’t have excellent credit, rates are high, or other less favorable conditions exist, you might end up paying more each month.
- Fees – Refinancing comes with some pretty hefty fees. You’ll either have to take on the burden of these fees on your own or appeal to your co-heirs to split the responsibility of paying the refinancing costs.
- Time – Refinancing can take a long time. In the meantime, you and your co-heirs will be responsible for making the mortgage, property tax, utility, and other payments on the property.
- New debt – Inheriting a property can feel like a financial boon. But if you refinance, you’ll almost inevitably be adding to your overall debt.
Skip the Hassle of Refinancing with EasyKnock
Many heirs consider financing to buy out their co-heirs. If everyone agrees to the terms and you can qualify for a favorable new mortgage, then refinancing is one possibility. But what if you want to avoid the debt, the lengthy process, and the tough conversations?
Enter EasyKnock. We offer alternatives to traditional real estate solutions that allow owners (including co-heirs) to convert their equity to cash by selling the home to us. Then, you can remain in the home as a renter while you decide how to proceed, possibly saving you time and money in the long run. Contact us today to learn more and see if you qualify.
***This article is published for educational and informational purposes only. This content is based on research and/or other relevant articles and contains trusted sources, but does not express the concerns of EasyKnock. Our goal at EasyKnock is to provide readers with up-to-date and objective resources on real estate and mortgage-related topics. Our content is written by experienced contributors in the finance and real-estate space and all articles undergo an in-depth review process.
- Forbes. What Happens to Your Mortgage Debt When You Die? https://www.forbes.com/advisor/mortgages/what-happens-to-your-mortgage-debt-when-you-die/
- Trust and Will. How to Change a Deed When You Inherit Property. https://trustandwill.com/learn/inheriting-a-house
- Zillow. 7 Types of Refinance Loans. https://www.zillow.com/mortgage-learning/types-of-refinance/
Tom BurchnellProduct Marketing Director
Tom Burchnell, Director of Digital Product Marketing for EasyKnock, holds an MBA & BBA in Marketing from University of Georgia and has 6 years of experience in real estate and finance. In his previous work, he spent time working with one of the largest direct lenders in the SouthEast.