Losing a spouse is an incredibly difficult experience, both emotionally and financially. One of the many concerns that arise is what will happen to jointly-held debts, like a mortgage. Mortgage insurance can provide some reassurance by paying off all or part of the remaining mortgage balance if a borrower dies, but the details depend on the type of policy.
What is mortgage insurance?
Mortgage insurance is a policy that protects the lender in case the borrower defaults on a mortgage loan. There are a few different types of mortgage insurance:
- PMI (private mortgage insurance) – Required for conventional loans with less than 20% down payment
- FHA mortgage insurance – Required for FHA loans
- VA funding fee – Required for VA loans
- USDA guarantee fee – Required for USDA loans
The insurance premiums are typically included in the monthly mortgage payment. Mortgage insurance does not directly benefit the borrower, but rather protects the lender’s interests. However, some types of policies can indirectly benefit the borrower’s survivors if it pays off all or part of the remaining loan balance upon death.
Does PMI pay off your mortgage if your spouse dies?
Unfortunately, standard PMI policies do not contain a death benefit. PMI only covers the lender in case of borrower default – it does not pay off any part of the mortgage balance if the borrower dies.
So if you have PMI and your spouse passes away, you would still be responsible for repaying the mortgage in full. PMI will not provide any payout to help cover the remaining balance.
Does FHA mortgage insurance pay off your mortgage if your spouse dies?
FHA loans have mortgage insurance just like PMI, but FHA policies work differently. Here’s an overview of how FHA mortgage insurance handles the death of a borrower:
- If only one spouse is on the mortgage, FHA insurance will pay the lender the lesser of the outstanding balance or the maximum claim amount (based on the initial loan amount). This closes out the mortgage entirely so the surviving spouse does not have to continue paying.
- If both spouses are on the mortgage, FHA will pay the lender the lesser of the outstanding balance or maximum claim amount upon the first death. This means the loan balance decreases, lowering payments for the surviving spouse, but it does not satisfy the mortgage completely.
So in short – yes, FHA mortgage insurance can pay off all or part of your remaining mortgage when a borrower dies, providing financial assistance to the survivors. The details depend on if one or both spouses are on the loan.
Does a VA loan get paid off if a spouse dies?
VA loans have a funding fee rather than PMI or FHA mortgage insurance. This funding fee does provide a partial payout upon borrower death:
- If only one spouse is on the mortgage, the VA will pay the lender 25% of the remaining loan balance when that borrower dies. This lowers the balance for the surviving spouse.
- If both spouses are on the mortgage, the VA pays 12.5% of the remaining balance when the first borrower dies. Again, this partially pays down the loan to assist the surviving co-borrower.
So while VA loans do not pay off 100% of the balance like FHA loans, they provide some limited financial assistance through a partial payout. This can make payments more affordable for the surviving spouse.
What about USDA loans?
USDA home loans require an upfront guarantee fee, similar to the VA funding fee. Unfortunately, this fee does not offer any type of death benefit or mortgage payoff. If a borrower with a USDA loan passes away, the surviving co-borrower would remain fully responsible for the remaining mortgage balance. The USDA does not offer any financial assistance in the event of a borrower death.
Are there any mortgage insurance policies that fully pay off the loan?
Most standard mortgage insurance policies only cover the lender’s interests and do not directly benefit the homeowner. But there are some optional policies you can take out that do provide a full mortgage payoff:
- PMI mortgage life insurance – Unlike regular PMI, mortgage life insurance will pay off your entire mortgage balance if you die. Premiums are typically around $15-30 per month.
- FHA mortgage life insurance – You can add this optional policy to pay off an FHA loan in full upon death, over and above the regular FHA insurance payout.
- Third party life insurance – You can take out a life insurance policy from an insurer like State Farm or Prudential and name your mortgage lender as the beneficiary to pay off the loan.
These supplemental policies come with an added monthly premium, but can provide peace of mind knowing your mortgage will be paid off if you pass away.
What happens if you only have one borrower on the mortgage?
If it’s just you on the mortgage, and you pass away, here’s how different policies handle it:
- PMI – Provides no payout, surviving co-owners remain responsible for mortgage.
- FHA – Pays off mortgage balance up to maximum claim amount.
- VA – Pays 25% of remaining balance.
- USDA – No payout, loan balance remains.
- Mortgage life insurance – Pays off 100% of remaining balance.
So FHA and mortgage life insurance are the only options that can fully pay off your mortgage if it’s only in your name. The survivors keep the home free and clear.
What if you refinance – does the insurance still apply?
If you refinance your mortgage, you will need to obtain new mortgage insurance based on the terms of the new loan. Any previous insurance or death benefits generally do not carry over or apply to the refinanced mortgage. Make sure to ask your lender about retaining coverage if that is an important concern.
Tips to prepare your finances if your spouse passes away
While mortgage insurance can help relieve some financial stress if you lose your spouse, here are a few other things you can do to prepare your finances:
- Maintain an emergency fund to cover expenses for several months.
- Make sure you have adequate life insurance to replace any lost income.
- Know account logins and have copies of important financial documents.
- Review beneficiaries on retirement accounts and other assets.
- Pay off joint credit cards and other unsecured debts.
- Consult fee-only financial planner or advisor for guidance.
Taking proactive steps can help ensure your financial security in the difficult event that you lose your spouse.
Key Takeaways
- Standard PMI does not offer any death benefit or mortgage payoff.
- FHA mortgage insurance can pay off the full mortgage amount if only one spouse is on the loan.
- VA and USDA loans offer no or only limited payoff upon borrower death.
- Supplemental mortgage life insurance can fully pay off your mortgage if you pass away.
- Refinancing may cancel previous insurance benefits – check with lender.
- Proper financial planning can help surviving spouses manage expenses.
Conclusion
Losing a spouse is incredibly hard both emotionally and financially. Mortgage insurance like FHA or mortgage life insurance can provide some reassurance by paying off all or part of your remaining mortgage balance should you pass away. This protects your surviving loved ones from burden of the debt. Be sure to understand your policy specifics, and supplement with proper financial planning, to best prepare your family for the future.