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What happens to a home equity loan on inherited property?

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Inheriting a Home with a Home‑Equity Loan: A Practical Guide

When a loved one passes away, the process of sorting out their estate can feel like a maze. For many families, one of the biggest surprises is finding that the property left behind is not a vacant lot or a fully paid‑off house—it comes with a home‑equity loan, or HELOC (home‑equity line of credit). The article “Inheriting Property with Home‑Equity Loan” from Fox 11 Online breaks down what that means for you, the steps you should take, and the options available to avoid foreclosure or a tax headache.


What is a Home‑Equity Loan?

A HELOC is a second mortgage that lets homeowners borrow against the equity in their home. Unlike a traditional mortgage that is paid in fixed installments, a HELOC offers a revolving credit line that you can draw on as needed. The borrower typically pays interest only while the loan is in the “draw” period, then must pay both principal and interest during the repayment period.

If a property with a HELOC is passed on through a will or intestate succession, the loan does not disappear. It stays attached to the real estate until the debt is satisfied, whether by paying it off, refinancing, or selling the property.


The Immediate Reality After a Death

  1. Probate is still required – The inheritor must go through probate to prove that the will is valid (or that the heirs are entitled to the property). The HELOC remains on the title until the estate settles the debt.

  2. Contact the lender – The first practical step is to notify the bank or credit union holding the HELOC. Most institutions will send a “Notice of Transfer of Ownership” to the heirs and provide the current payoff amount.

  3. Review the loan documents – A HELOC’s terms vary. Some lenders allow the new owner to “assume” the loan if the heir meets credit criteria; most, however, require the heir to refinance or pay off the debt entirely.

  4. Assess the equity – If the property’s market value is higher than the outstanding HELOC balance, the estate has equity that can be distributed. If the balance is higher, the estate will owe the bank, and heirs must decide whether to sell, refinance, or take a personal loan.


Options for the Heir

OptionWhat It MeansProsCons
Pay the HELOC in fullUse inherited cash or a new loan to satisfy the debtKeeps the property, no future loan paymentsRequires a lump sum; may not be feasible
Refinance the HELOCReplace the HELOC with a new loan—often a first‑mortgage typeMay secure a lower interest rate; convert to fixed paymentsCredit approval required; closing costs
Assume the loanTake over the existing loan termsKeeps original interest ratesCredit check, may not be offered
Sell the propertySell and use proceeds to pay off the HELOCQuick, no ongoing paymentsPossible capital gains tax; market conditions
Use a reverse mortgage (if the heir is older)Convert home equity into cashNo monthly paymentsRequires age 62+, higher fees

The article emphasizes that the decision often hinges on the heir’s financial situation and the property’s market value. For instance, a single‑family home in a gentrifying neighborhood might be worth more than the HELOC balance, making a sale attractive. Conversely, a house in a slower market might be better to keep, but that requires refinancing.


Tax Implications You Can’t Ignore

  • Estate taxes – In most states, the value of the inherited home is added to the estate’s taxable estate. However, the HELOC reduces the net estate value.
  • Capital gains tax – If you sell the property, you’ll need to calculate the gain from the original purchase price (adjusted for improvements) to the sale price. The HELOC payoff itself is not taxable.
  • Deductible interest – If the heir keeps the home and uses it as a primary residence, the interest on a second mortgage may still be deductible under the IRS rules for “home equity debt” (as of the latest tax law, only debt used for home improvements is deductible, so verify with a CPA).

The Fox 11 article notes that consulting a tax professional early can help avoid surprises at tax time.


Legal and Practical Tips

  1. Get everything in writing – When the lender sends you the payoff amount, request a written statement and keep it for probate records.
  2. Check for “right‑of‑first‑refusal” clauses – Some wills give the estate a right to purchase the property before offering it to other heirs. The HELOC doesn’t affect that right, but it does affect the price you’ll need to pay.
  3. Consider a “deed‑in‑lien” – If you can’t pay the HELOC outright, you might hold the property on a deed‑in‑lien while you refinance. This protects the lender but can complicate future sale.
  4. Ask about loan assumption – Even if the lender’s policy is to disallow assumption, a well‑qualified heir may still get approval. Always ask.

Real‑World Examples

The article features a short case study of a woman who inherited her father’s suburban home. The HELOC balance was $80,000, while the home’s market value was $200,000. She chose to refinance into a 30‑year fixed mortgage, paying off the HELOC with a $150,000 refinance. She saved on interest and avoided the risk of foreclosure if the market slipped.

Another example shows a couple who inherited a downtown apartment that was worth $350,000, but the HELOC was $300,000. They opted to sell the unit and used the proceeds to cover the loan, then split the remaining equity. The sale was quick because the property had a high rental demand.


Bottom Line

Inheriting a property with a home‑equity loan is not a death‑bed decision; it’s a financial puzzle that requires a clear plan. Start by contacting the lender, understanding your legal responsibilities, and evaluating whether paying, refinancing, or selling is the best route. Don’t ignore tax implications or probate requirements—those can turn a simple inheritance into a long‑term burden if mishandled.

For more details on the legal and tax nuances of inheriting real estate, Fox 11 recommends reaching out to a local estate attorney or a certified public accountant. And as always, the sooner you gather information, the smoother the transition will be.


Read the Full Fox 11 News Article at:
[ https://fox11online.com/money/mortgages/inheriting-property-with-home-equity-loan ]