If You Don’t Sell the House

You are not required to sell the house. But you are required to repay the loan, up to the value of the house.

 In your will, you could leave instructions that other assets of yours are to be sold to pay off the loan, so your heirs can inherit the house. Check with your heirs first.

Your heirs might inherit the house and then use a traditional or forward mortgage to pay off the loan, assuming that the house has kept its value. Then one of your heirs can live in it, perhaps paying rent to the other heirs. Or the heirs can simply rent out the house, holding it as an investment.

You or your heirs can repay the loan with other assets besides the house. If you own a second home, you could sell that and use the proceeds to repay the loan. Or you could sell still other assets you own, such as securities. This might be especially appropriate if you believe you don’t need a second home now, or if you think your main home will appreciate more in the future. Heirs might sell their own home, if they own one, and move into the borrower’s home.

If you sell securities to raise money, try to sell those on which you have little or no capital gains. Typically that will be bonds or bond funds. Try to avoid taking a nicely diversified portfolio and undiversifying it. And be mindful that securities that have sat there like slugs for years may be vastly undervalued, while securities with enormous capital gains may be ready to nosedive. There is an old saying: Don’t let the tax tail wag the tax dog. But do keep tax considerations in mind when you are selling.

As it is, too many investors sell their winners and hold on to their losers. People seem to be in the habit of watering their weeds and cutting down their flowers.

A reluctance to sell losers is clearly a part of the human condition. Here’s a test to see if you are normal in this regard:

You need $5,000. Right away. Maybe you have to replace your roof.
You own a stock that you bought for $10,000, and it is now worth only $5,000. You also own a stock you bought for $1,000, and it is now worth $5,000. Which would you sell, the winner or the loser?

Most people would sell the winner, not the loser, even though selling a winner forces you to pay capital-gains taxes and selling a loser gives you a tax deduction (unless these investments are in retirement accounts).

Experiments have shown, in fact, that most people feel the pain of a loss twice as intensely as they enjoy pleasure from a profit. “Loss aversion,” as it is called, may be an inheritance from the days when we lived in caves, when any loss threatened our very lives – a loss of food, water, warmth, or shelter.