A deceased loved one’s debt: Who pays what?

This was originally published on Monday, July 24, 2017, in the Pacific Daily News.  Click here to subscribe to the PDN.

Question: My sister passed away unexpectedly. She left behind a few loans, including a mortgage, a new car loan and a student loan. Some of the loans she took out were done by her, but a few were co-signed by family members. She passed with good credit and was up to date on her loan payments. Our family would like to get a better understanding of what we are responsible for and what happens to the loans she had acquired by herself.

Answer: Condolences to you and your family. Losing a family member is certainly emotional. Once the ceremony of the funeral and burial are done, the stress of finalizing your loved one’s estate can be overwhelming.

Generally, creditors get paid first from the estate and assets left behind; the beneficiaries receive whatever remains. The person who is legally appointed to be the executor will use the assets to pay off the debt. This can be done by using money left in a bank account or even selling off property or stocks.

If there are not enough assets to pay off the debt, creditors may get part of what is left and the family members may not be responsible to pay off the debt.

Sometimes it is not that straightforward. The type of debt may also play a factor as to who is responsible for paying off the debt.

  • Mortgage. If the mortgage has a joint homeowner, he or she will inherit the house and the mortgage. Federal law prohibits lenders from forcing a joint homeowner to pay off the mortgage immediately after the death of the co-owner. If the mortgage doesn’t have a joint homeowner the executor can continue to pay the mortgage from the estate. If the estate doesn’t have enough money, the person(s) who inherit the house can take over the mortgage payments.
  • Home equity loan. If someone inherits the house, they will also inherit the loan. A lender can request the inheritor to repay the home equity loan immediately. If the inheritor doesn’t have the money, the lender may require selling the house. Lenders do have the option to work with the inheritor to take over payments.
  • Credit cards. If the credit card has a joint account holder, he or she will be responsible for the unpaid bills. Authorized users listed on the account are not responsible to pay off the remaining balance. If the estate doesn’t have enough to pay off the credit card balance, the credit card companies absorb the debt. Credit card debt, unlike a car loan or mortgage, is considered an unsecured loan because the loan is issued on the borrower’s creditworthiness.
  • Car loan. If the car loan has a co-signer, the co-signer is responsible for continuing the payments or paying off the loan. If the deceased is the sole owner of the loan, the executor can pay the loan from the estate. If the payments stop, the lender can repossess the car. If the estate can’t pay off the loan, the inheritor of the car can continue making payments.

Michael Camacho is president and chief executive officer of Personal Finance Center. He has more than 20 years of experience in retail banking and at financial institutions in Guam and Hawaii. If there is a topic you’d like Michael to cover, please email him at moneymattersguam@yahoo.com and read past columns at the Money Matters blog at www.moneymattersguam.wordpress.com.

Second mortgage takes advantage of equity

This was originally published on Monday, March 10, 2014, in the Pacific Daily News.  Click here to subscribe to the PDN.

Question: I recently had some health issues and the medical bills are more than my insurance can cover. I want to take a second mortgage on my home to cover my medical bills. What advice can you give me?

Answer: I am sorry to hear about your health issues and hope that your health is improving. A second mortgage can be a possibility to help pay your medical bills. A second mortgage is another mortgage or lien on your home; you are using your home as collateral to receive an amount of money. If you have paid off the original mortgage and take out another loan, that is not a second mortgage and is considered a primary loan.

A second mortgage loan allows you to access the equity in your home. Equity is the difference between the balance of your loan and the value of your home. For example if your home is valued at $300,000 and your mortgage balance is $200,000, you have $100,000 in home equity. Second mortgages are usually used when you need a large sum of money. Many people use a second mortgage to pay large bills, college tuitions, or purchasing or renovating a home.

The term “second” means that it is a sub loan to your original mortgage. If you cannot pay your mortgages your home will be sold to pay off the original loan. If there is not enough money after the sale to pay your second mortgage, that lender does not get the full amount owed to them. For this reason second mortgages usually have a higher interest rate than your first mortgage.

There are two types of second mortgages:

• Home equity loan. A home equity loan is a second mortgage in which you are given a lump sum of money. You pay the loan back much like you would your first mortgage, in installments over a predetermined period of time. This type of loan is best used when you need all the money up front, usually for a home renovation or incurred medical bills. Home equity loans are usually a fixed rate.

• Home equity line of credit (HELOC) works almost like a credit card. You receive a line of credit that is based on the equity in your home and you can withdraw from it. How much or when you use the credit is up to you. Usually, the line of credit comes with a credit card or checking account, so you have access when you need it. You would use this second mortgage to pay expenses that occur over a period of time, like tuition or ongoing home repairs. HELOC’s usually have adjustable rates. You only pay for the portion of the line of credit that you use. Paying down the balance allows you to replenish your credit limit, similar to a credit card. Be careful if you are taking out a second mortgage to pay off your debts. Unless you change your spending habits, you will find yourself back in the same position and maybe losing your home. Remember that you still have to make your monthly payments on your first mortgage. In other words, you will be making two payments monthly, your original and second mortgages. Before taking out a second mortgage loan, be sure you can afford the extra payment.

Michael Camacho is president and chief executive officer of Personal Finance Center. He has more than 20 years of experience in retail banking and at financial institutions in Guam and Hawaii. If there is a topic you’d like Michael to cover, please email him at moneymattersguam@yahoo.com and read past columns at the Money Matters blog at www.moneymattersguam.wordpress.com.

Should we consolidate our debt?

This was originally published on Monday, August 5, 2013, in the Pacific Daily News.  Click here to subscribe to the PDN.

Question: My wife and I recently got married. Both of us have school loans, car loans and some credit card debt before we got married. We are thinking about getting a consolidated loan to work our way out of debt. Can you give us some information about consolidated loans?

Congratulations on your recent marriage! It can be challenging when two individuals become one and are now sharing one financial goal. Previous relationships, credit cards or other loans that were once one person’s financial responsibility are now shared with their new partner and vice versa.

A consolidated loan or debt consolidation involves taking out a new loan to pay off preceding debts, such as credit card, personal, school or car loans. You can combine several existing loans into one loan. It can be a very powerful tool to reduce debt quickly and improve monthly cash flow if done properly.

There are several ways to consolidate your loans:

• Credit card balance transfer. You may have been offered a credit card with a very low interest rate and are thinking about accepting it and paying off your outstanding debt. Many of these cards are offered as a marketing tool. Pay close attention to the fine print. How long will the low interest rate beH in effect? After the promotional interest rate period is over, how high is the interest rate going to be? Are there any hidden fees? If you are going to use a credit card as a way to consolidate your debt, you will need a credit card with a large enough credit limit and a low enough interest rate that would make using the credit card a more economical and smart choice.

• Personal loan. An unsecured personal loan from a financial institution can be used to pay off your debts. It is important that you choose wisely. You do not want to be in a situation where your monthly payments are larger than you what you are paying now or the interest is more than the combined interest you are paying currently.

• Home equity loan. A home equity loan uses your home as collateral. Many financial institutions require that you have a certain amount of equity paid into your loan. Home equity loans usually have a lower interest rate than most loans but carry the most risk. If an issue arises that you cannot make your payments, you risk losing your home. Most financial advisors usually caution that using your home to pay off debt is generally not a good idea.

• Debt consolidation loan. These loans are specifically used to consolidate debt into one loan. Interest rates depend on your credit rating. Some people with bad credit get approved for a consolidated loan but at very high interest rates. If you find yourself in that position, it is best to make a decision in which you are paying the least on interest or that your monthly payment is not higher than what you are paying now.

Michael Camacho is president and chief executive officer of Personal Finance Center. He has more than 20 years of experience in retail banking and at financial institutions in Guam and Hawaii. If there is a topic you’d like Michael to cover, please email him at moneymattersguam@yahoo.com and read past columns at the Money Matters blog at www.moneymattersguam.wordpress.com.