Let’s say you live to age 80. The executor of your estate will likely sell your house, pay off the mortgage, and settle your estate. The bank gets paid.
How is that different than a 40 year mortgage to a 20 year old who lives in it until age 60 and pays it off? The bank still gets paid.
Or yet again, offering you a 15 year mortgage and you pay it off at age 70? Or you die at age 60, the executor sells it, and pays off the bank?
I’m not seeing a situation where the bank gets screwed other than by you defaulting which is a risk in every loan. Death does not equal default because the bank has a security interest in your house ahead of any other creditor you may have.
I’d consider a small life insurance policy. Enough to pay off the loan in case something happens.
Why? Well, the thought of the bank just getting the house and the equity would bother me. I much rather leave my estate to a charity that I choose. Why let the bank make a fat profit?
The OP is 55? you can still qualify for a policy. Any money left after paying off the mortgage could go to a charity too.
What happens if, when you get a little older, you have catastrophic medical expenses, or you have to go live in a nursing home or some such place. That would be very expensive, and you might not be able to pay for that AND continue paying for the house.
How much equity would you then have in the house, that you might be able to recover by selling it?
Why are so many people assuming that the bank gets to keep the equity? As Doctor Jackson points out, this isn’t how it works at all.
The OP owns the house. The bank has a secured note on the house, meaning that they have a right to seize the house to pay off the note, and that they must be paid from the proceeds of a sale of the property.
A sale of the property happens at the owner’s initiative (or the heirs/estate, who are the new owners after the OP’s death). A foreclosure is just a type of sale that happens at the bank’s initiative.
In either kind of sale, the proceeds of the sale are applied to the balance of the mortgage, with any excess going to the owner. (Again, perhaps the estate/heirs). If the proceeds are insufficient to pay off the mortgage, then the result depends a little on state law and negotiation, but essentially the bank either cancels the remaining debt, or they don’t. The estate of a decedent can be responsible for paying off their debts, but any excess debt cannot be passed down to heirs.
Of course, if the OP dies with a mortgage in place, a sale isn’t guaranteed. One (or more) of the heirs could choose to keep both the property and the mortgage. I don’t know the details of how this works, but I’ve seen it happen with properties in both Washington and California.
If the estate has equity in the house over and above the remaining mortgage balance, then why would it go to foreclosure? Wouldn’t the executor just sell it?
Why? Life insurance is generally paid out upon the death of the insured. In this case, to whom? Save the insurance premium money for daily living expenses.
My bank makes it a requirement of the mortgage (it’s bundled into the payments) that we maintain enough insurance to pay of the loan should anything happen to either myself or my wife.
Not sure how or if that would apply in this situation, or what the cost would be.
Make sure it doesn’t have an early pay-off clause. Then you can do a re-fi like you can for any other mortgage. If you really want to pay it off, that is. If interest rates get low again for instance.
Hardly anyone pays on a mortgage for 30 years and then pays it off. They usually move, refinance, go into foreclosure.
If this is the only deal to keep your house and you want to keep your house, you’d better take it, even if there is an early pay-off penalty.
So in the end, I am still not sure what the OP’s concerns are. He’s unlikely to reach payoff of a 40-year mortgage in the normal course of things - he’d be 95. But that’s true of most mortgages; they are paid off through sale or refinance long before term. Unless I am misreading the financial situation, $750 a month is pretty darned good for home ownership. Four-and-a-bit is not the lowest interest rate around, but it’s well below long-term average and it’s fixed.
Whether the OP intends to live in the house for life or sell it for another around retirement age, I don’t see a problem.
If you build some equity in the house, or the house goes up in value (i.e. the real estate market recovers) - which, unless you bought a huge bubble house - it probably will before you are ready to move into a retirement home - you’ll be able to sell and see SOME equity.
If not, $750 a month is better than you can do for most apartments. And certainly better than you’ll do in ten years.
The bank is figuring that in 15 years, you’ll retire, sell the house and pay off the mortgage and go live off your social security check in Sun City.
In any foreclosure sale, the bank owes a fiduciary duty to the homeowner to do some reasonable diligence in maximizing the sale value. If the home is worth $200k and the bank has an outstanding balance of $10k, it can’t just sell the home for $10k and be done with it. It must take reasonable steps to maximize value.
Admittedly, they don’t have to do very much, but if it just allows property to be sold at fire sale prices, then it can be held liable to the homeowner.
That being said, Tom Tildrum’s point is also valid. The executor of the estate isn’t just going to let the house rot to the ground. If it has equity, as most homes do, then you put the house on the market and sell it yourself. The bank’s risk of foreclosure is no greater because a person might soon die than it is in any other situation.
If you truly have no dependents of any kind, then you ideally want to end your life with zero or slightly negative assets. The problem being, this is tricky to plan for if your time of death is unknown. Fortunately, there’s a financial instrument that’s designed for this called a Life annuity. It’s possible that structuring a life annuity correctly could leave you with lower payments than your mortgage payment. You should speak to a financial advisor and see if something like this is possible.
Why would he want to pay the mortgage off early? Even if he wants to leave an estate to his heirs, he can just leave them the cash instead of higher equity in a house they will have to sell.
He is not ripping off the bank by getting a 40 year mortgage he will never pay off. He will be making regular payments at the agreed upon interest rate. When he dies, the house will be sold by his estate and the mortgage will be settled out of the sale, and any remaining money will go the the home for wayward cats.
He isn’t screwing the bank, the bank isn’t screwing him. Banks routinely give mortgages to people who almost certainly won’t live in the house for the full term of the mortgage. They don’t get screwed by this, either when the people move or when they die, because the mortgage is secured by the house itself.
The only way the bank can get screwed is if the value of the property plummets well below the outstanding amount on the mortgage. So if the OP decides to burn down the house and then kill himself, the bank might have a problem. But even then there will surely be insurance on the house and the bank will get most of its money back, and the insurance company will get screwed. Except it’s the insurance companies business to take small monthly payments from lots of people and give out large infrequent payments to a few people while still making a profit.
You never answered the rest of Rattle’s question: What is the current market value?
My guess is that it is less–such that the bank would suffer a significant loss (after the various costs involved) if they were to foreclose on you–and this is why they are offering you a good deal–they don’t want this loss to show up on their books. There are also various laws and regulations encouraging banks to offer deals in situations where the homeowner falls behind in payments–which may or may not apply in your case.
What’s the downside of dying 10 million dollars in debt as opposed to 10 dollars? If someone would lend me 10 million, I could kill myself on hookers and blow rather than die a slow death after a stroke or cancer.