There are three types of borrowing associated with an inherited property: an inheritance loan (also known as probate loan), an inheritance advance, and refinancing of inherited property.
In an inheritance loan, the heir takes out a loan and is required to pay monthly interest and mortgage payments. The heir can use the loan proceeds for whatever purpose he likes.
In an inheritance advance, there are no monthly payments. The heir receives the inheritance advance from the private lender at a discounted rate, and it is the private lender who assumes the risk and the waiting period to receive the inheritance amount from the estate.
In refinancing, the heir who wants to buy out the property from the other co-heirs agrees with all co-heirs that the property is refinanced. The amount received from the refinancing is used to pay out the existing debt and all the other co-heirs, and it is the remaining heir who seeks to own the property who will be the one to assume the refinanced mortgage.
In all cases, it is a private lender and not the traditional lender who will lend you money using your inheritance as collateral.
In an inheritance loan, an heir who wants or needs his money immediately will apply with a private lender for a loan since the distribution of inheritance can take one to two years. The private lender will evaluate the heir’s application and determine, based on the amount the heir will receive, how much money to lend to an heir. Once approved, the heir needs to make monthly interest payments, secured by an assignment to the lender of the full amount of the inheritance once the probate process ends. Because these types of loans are usually unregulated, interest rates are high, and heirs can be subjected to predatory practices.
For example, A is an heir of B’s estate and stands to receive an estimated $100,000 once the probate process ends. A needs the money right away and applies for an inheritance loan. The private lender will assess A’s application and the amount of time it needs to wait to receive the inheritance. It is possible that the private lender will only lend A the amount of, for example, $85,000 with an annual interest rate of 10%. In exchange, A will assign his entire inheritance, whatever that amount might be, to the private lender. A will receive the amount of $85,000 immediately and will pay to the private lender the annual 10% interest rate of $8,500 until the private lender receives the inheritance proceeds from the estate. All the heir is required to do is to assign the entire inheritance to the private lender. If the heir’s inheritance is distributed earlier, the heir loses out on the amount it could have gotten since the heir only receives a fraction of his inheritance for the loan amount and is even paying the annual interest rate until the inheritance proceeds are paid.
An inheritance advance is a better deal than an inheritance loan. In an inheritance advance, the heir will apply with a private lender for an advance on his inheritance. The private lender will assess the application and will pay the heir a discounted rate for the inheritance. There are no monthly interest payments.
In the same example above, the heir, who stands to inherit $100,000, will apply for an inheritance advance. The private lender will give the heir $80,000 for the $100,000 inheritance proceeds. The heir will not pay any interest rate anymore but will assign $100,000 of his inheritance proceeds to the private lender. If the heir inherits $150,000, only $100,000 goes to the private lender and the remaining $50,000 will go to the heir. Usually, if the heir inherits less than $100,000, the heir will be liable for the difference.
In an inheritance advance, there is no loan. The private lender purchases the heir’s inheritance at a discounted rate. It is the private lender who collects the inheritance from the estate.
Refinancing the inherited property
When an heir wants to buy out his other co-heirs, he comes to an agreement with his co-heirs that he will buy them out through refinancing. Refinancing the property (usually the residential family home) will depend on how much equity is left in the house and the credit score of the heir who wants to buy out his co-heirs.
Equity is computed using the market value of the house less the remaining mortgage. Usually, the interest rate in a refinancing loan of inherited property is high, and the term is short. This type of loan is given by a private lender and not the traditional lender. The approval process is quick in order for you to complete the buy-out quickly. Once the title is consolidated with the remaining heir, the heir can then take out the traditional loan with a longer-term and lower interest rate to take out the refinanced loan.
Here, all the heirs must be in agreement. The person who will take out the refinancing loan is the personal representative of the estate, either the administrator or the executor, subject to an agreement among the co-heirs that the refinanced loan will be assumed by the remaining heir. It is the administrator or executor who receives the loan refinancing proceeds and distributes it to the co-heirs who want to be bought out. The title is then transferred to the remaining heir who assumes the mortgage.
For example, if the market value of the house is $1,000,000 and the remaining mortgage to be paid is $200,000, the equity is $800,000. If there are two co-heirs, siblings, who will inherit the property, one heir can borrow $700,000 from the $800,000 equity to pay off the $200,000 loan plus the other co-heir at $500,000. Title can then be transferred to the heir who will assume the $700,000 refinanced mortgage. Usually, the $700,000 refinanced mortgage on a probate asset will be on a high-interest rate at a short term. Once the executor or administrator transfers the title to the heir, the heir can then pay off the refinanced loan through a more traditional mortgage offering a lower interest rate with a 30-year term.
Here, it is the executor or administrator who takes out the refinancing loan since the executor or administrator is the only person authorized to transact for the estate’s assets. The $700,000 loan proceeds are not released to the heir but to the executor or administrator, subject to an agreement among the heirs that the remaining heir will assume the mortgage. The executor or administrator distributes the $700,000 loan proceeds by paying off the initial mortgage of $200,000 and distributing the remaining $500,000 to the other heir. The title is transferred to the remaining heir, subject to the refinanced short-term high-interest loan of $700,000. The remaining heir can then take out a more traditional long-term low-interest mortgage to pay off the $700,000 refinanced loan.
Borrowing against inherited property has its challenges, but it is possible. There are lenders who are willing to give you the money equivalent of your inheritance now (at a discounted rate) in exchange for the right to receive your inheritance in the future. Navigating through this process can be complicated, and it is important to be represented by an experienced lawyer who can ensure that your rights are protected in every step of the way. Should you need assistance, we at the Law Offices of Albert Goodwin are here for you. We have offices in New York, NY, Brooklyn, NY and Queens, NY. You can call us at 718-509-9774 or send us an email at email@example.com.