It is always good to receive a house as a heritage since you can live in it without having to pay for a loan. However, having or owning a home is not free it involves costs such as property taxes, insurance costs, utility bills and other maintenance costs. Whether you require funds to finance those costs or have other priorities that you want to address using your new equity, you might wonder if it is possible to take a home equity loan or a line of credit on the inherited property.
What is a Home Equity Loan?
A home equity loan enables you to get a loan based on the available equity in your home. Home equity is the market value of your home minus the balance of your mortgage. This is how equity works, for instance, if you inherited a home worth $250,000 and you do not have a mortgage on it, then your home equity is $250,000. A home equity loan is where you use that equity as collateral for a cash loan.
Home equity loans offer cash in one amount, and it may be $15,000 to $200,000 or even more. The money is disbursed to your account outright so you can spend it on anything you want – home improvements, credit card balances, college fees, and the like. The loan is then repaid in a fixed monthly amount for a fixed period of time which ranges from 10 to 30 years.
There are two main ways of using home equity for cash in addition to standard home equity loans: home equity lines of credit (HELOCs). HELOCs work like credit cards with variable amounts that one can borrow and repay periodically for the next 10 or 20 years.
Is It Possible to Secure a Home Equity Loan on a Property Left Behind by a Deceased Person?
The possibility of getting home equity financing on an inherited property depends on whether you get the home or only a share of it. Here's how it works:
Inheriting a Home Outright If you receive real property as a direct inheritance without having other co-inheritors, then you can get a home equity loan or a HELOC. It should be nearly as easy as getting a home equity line of credit on a home you own. Lenders will consider factors like:Lenders will consider factors like:
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Your credit rating and credit history
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Your debt-to-income ratio
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The appreciation of the home at the present time
- How much of your home’s value you have to lend
To be able to take home equity financing on that property you must hold the title of the inherited property free and clear. You also need to live in the home as your principal residence for most lenders to consider you for a loan.
Taking an Interest in a Property by Inheritance
It becomes a bit complicated if you have received a certain percentage share in a property together with others through inheritance. In this case, the property is owned jointly by the two individuals or a group of people. If you wanted to take out financing you would first have to purchase the interests of the other heirs to make you the sole owner.
For example, perhaps you were left with a 50/50 interest in the family home, and one of your siblings received the other 50/50 interest upon the death of your parents. In the case of home equity financing, you would have to agree to buy your sibling’s 50% of the home’s value. Then you could take out a loan against the equity, but it would be after already buying out the other heir.
At times, the co-inheritors may sit down and make arrangements to take a financing at one time. However, this becomes hard and more complicated due to the underwriting requirements that accompany it. Consult with lenders to find out what one can do if one is interested in co-owning an inherited property.
Applying Home Equity Loan Funds Pertaining to an Inherited Residence
Home equity loans make it possible to get money for operating now from the equity that has been accumulated in an inherited house. Here are some smart ways to use loan proceeds:Here are some smart ways to use loan proceeds:
Consolidate credit card and other existing debts – Through home equity lending, high-interest credit card balance, auto loan, student loan or personal loan balances can be paid. This involves taking debts and rolling them into one monthly payment at a lower interest rate.
Healthcare expenses – Extensive medical bills can be redeemed with cash from home equity loans or credit in case you received the home with no mortgage.
Top up retirement cash – what better than using home equity to cater for routine expenses and fun without having to dip into retirement savings. It can also provide additional money if current sources of retirement income are insufficient.
Educational finance – The home equity loans enable one to acquire education such as a degree, a professional course or any other course that opens up employment opportunities.
Do repairs – It may be worthwhile to improve the comfort and the value of inherited homes by altering or remodeling them. They might also enhance the home’s resale value or make it easier to rent out after some time.
Venture – It is possible to finance the launch of a small business with the proceeds from borrowing money against an inherited home equity. The only thing you have to remember is to be realistic with your financial expectations or goals.
The Dangers of Home Equity Financing on Inherited Real Estate
While home equity financing does provide useful cash in hand, leveraging an inherited property also comes with potential downsides:While home equity financing does provide useful cash in hand, leveraging an inherited property also comes with potential downsides:
Reduction in equity – As the amount borrowed stands as a balance against the equity, the amount available as equity reduces. Drawing too much equity also means that there is little left to be realized when the property is sold.
Risk of default – If you fail to service the loan, the lender can seize your property through foreclosure. This also means possibly parting with an inherited property that may have been in the family for generations.
Payback responsibility – It is important to weigh the benefits against the cost in terms of taking up a 20/30 years loan repayment that will have to be paid even if you have sold the property.
Closing costs and fees – similar to the customary mortgages, it also comes with the cost of processing and putting together the home equity loan.
Evaluates whether it is more advantageous to use equity in inherited real estate or to own the property free and clear. Ensure that one consults a financial and legal advisor on the legal procedures before making decisions.
In Summary
I will be receiving a house in as a bequest, which means not only obtaining a precious possession but also the answer to part of your housing requirements without having to pay for a home loan. Thus, home equity loans or lines can be obtained against the inherited real estate the owner fully owns and provides easy access to cash. However, co-owning interests complicate the process. Be aware of the dangers involved so you can make wise decisions as you engage in equity lending against family real estate.
