Can You Refinance a Property Held in Trust?
The current high inflation rate in the US has led to steadily increasing home mortgage rates, from around 3% in 2021 up to 7% in July 2023. Although you can refinance a mortgage for varying purposes, many homebuyers are counting on a refinance in the future when mortgage rates inevitably drop below the current rates. If you’re one of those considering refinancing your house that is titled under a trust, then this post is for you. Some homeowners who have their property held in trust are reluctant to refinance because of a lack of understanding of the process or if it’s even possible. Sometimes, it’s the other way around. The concern of refinancing can keep homeowners from putting their homes in a trust, even if they want to avoid probate.
The issue of refinancing a house, or any personal property, held in a trust is a simple one. Refinancing issues shouldn’t keep you from putting your home in a trust. In addition, the benefits of putting property in a trust often outweigh any mortgage refinancing difficulties. This post will help you understand the process of refinancing a house that is held in trust.
What Type of Trust is Your House Titled in?
A trust is a very common estate planning strategy that serves many purposes. Holding a house or any property under a trust is an excellent way of passing down properties without paying gift taxes on deed transfers. Properties held in trust also provide better asset control, protection for your beneficiaries, and prevention of probate. Below are the ways a house can be held in a trust.
Living Trusts or Revocable Trusts
A living trust is a revocable trust, meaning it can be changed. When you create a revocable living trust, you become its trustee. As trustee, you can modify the trust and thus, you can apply for refinancing and other necessary changes to the property.
Irrevocable Trusts
If your house is held in an irrevocable trust, refinancing can be limited. You may have to do more shopping around for banks who are willing to refinance properties under irrevocable trusts. When you die, your living trust becomes irrevocable and your beneficiary or successor trustee will administer the trust according to your instructions. If necessary, your beneficiary can apply for refinancing under their own name.
Options for Refinancing a House in a Trust
Based on our experience here at Rilus Law, banks or lenders give you two options when applying to refinance a house held in trust:
Option 1: Have an attorney write an opinion letter
A legal opinion letter is a formal letter from your attorney confirming that the trust is valid, active, and exists under state law. This option may sound simple, but lenders often get caught up on the terms and details of the opinion letter. Coming up with an opinion letter can be an inefficient process, requiring hours of back-and-forth communication between the attorney and the lender. And more billable hours mean more expenses for you. In addition, these letters come with attorney liabilities. In other words, attorneys can get sued over the information in the opinion letters they sign. We do not recommend this option for any of our clients.
Option 2: Move the house out of the trust and put it back after refinancing
Banks and lenders have no issue refinancing a house titled in your name. So, this option simply requires you to transfer the house out of the trust before refinancing. Transferring ownership is an easy enough process, and refinancing can be done as soon as the house is re-titled. Once the refinancing is done it is essential to transfer the house back into the trust. Otherwise, the property loses the benefits of the trust, such as protection from probate, etc. Not re-titling the house back into the trust is a common mistake, not just with refinancing but also when people first make their trusts and need to change titles accordingly. If you fail to re-title your home, your loved ones will have to deal with the probate process to do so after your death.
Real Estate and Trusts: A Wise Investment in Your Future
Your home is an investment, and as such, you should have the option and power to use it as leverage. You can leverage your house by refinancing your mortgage to avail of cash loans, lower your mortgage rates, or shorten your loan term. On the other hand, putting your house under a trust is an excellent strategy to plan and organize your estate, providing for your loved ones in the event of your death.
Navigating the intricate landscape of refinancing a home under a trust might seem daunting, especially amidst the backdrop of fluctuating mortgage rates. The tussle between the prospect of a lower rate and the complexities of trust arrangements can leave homeowners unsure about the best path forward. Yet, the pursuit of refinancing shouldn't deter you from safeguarding your estate through trusts, nor should it hinder the advantages they offer. Remember, understanding and knowledge are your greatest allies in this journey.
We believe that you should be empowered to make informed decisions about your assets, ensuring your financial security and that of your loved ones. To take that empowerment a step further, we invite you to book a free Personal Family Legal Session. This session is tailored to address your specific circumstances, answer your questions, and provide you with a roadmap for a comprehensive estate plan. Whether you want to create a trust or update an existing one, give us a call today to schedule.