If you should pass away with debt still on the house and have no heirs, that is not a concern. Probate courts would probably liquidate the house and use the proceeds to satisfy the remaining balance on the mortgage. If you have more productive uses for your money than aggressively paying down your mortgage, then there's likely no harm done in using that money for other purposes or your own enjoyment.
The interest on your home mortgage is generally tax-deductible. This means that your interest rate on your house is lower than interest on other loans, on an after-tax basis. It's therefore that much easier to beat your home loan interest rate with alternative investments that make more for you than your mortgage is costing. This is a reason why you may have better uses for your money than paying down a mortgage.
Since tax-deductible home interest is a relatively cheap loan, you may be able to come out ahead by making the minimum payments on your home mortgage and investing any extra money in assets that you reasonably expect will outperform your home mortgage.
Tax Consequences of Selling Assets
If you do decide to pay off your mortgage, so that you own your home free and clear (and therefore die without mortgage debt), the IRS will assess capital gains taxes on investment assets you sell off at a profit to pay off your loan. If you have held the assets for less than a year, any profits will be taxed at ordinary income rates. If you have held them longer than a year, more favorable long-term capital gains rates may apply.
If you find it difficult to find other assets that you can invest in that you expect to produce greater returns than the cost of your home mortgage interest, you might consider refinancing. As of July 2012, home mortgage interest was near all-time lows. If you can refinance with these low rates, you may have an easier time finding suitable investments for money you don't use to aggressively pay down your mortgage. This could potentially lower your mortgage payment or extend the term of the mortgage or both. You would likely have more cash on hand to spend. If you die before the mortgage is paid off and you have not left the house to anyone, the probate system takes over after you're gone and divides up your property under your state's intestate laws.
Homeowners With No Heirs
Once you turn 62, you may become eligible for a reverse mortgage. These plans allow you to "sell" your home equity in exchange for a stream of income over your lifetime. Reverse mortgages generally allow you to continue to live in your home. When you die, the reverse mortgage company keeps your home. This would not be an appropriate strategy if leaving the home to heirs is a significant concern. With no heirs, though, unlocking the equity of your home and converting it to an income stream may be an attractive option.
- Jupiterimages/Polka Dot/Getty Images