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.
Putting your property into a trust can provide many benefits such as avoiding probate and protecting assets. However some homeowners worry that having their property in a trust will make it difficult to refinance their mortgage. The good news is that you can refinance property held in a trust with some extra steps. This comprehensive guide will explain everything you need to know about refinancing a home or property that is titled in a trust.
What is a Trust and Why Put Property in One?
A trust is a legal arrangement where one party (the trustee) holds assets for the benefit of another party (the beneficiary) There are two main types of trusts
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Revocable trusts – The grantor creates the trust and transfers assets into it but retains control. They can modify or revoke the trust at any time. Also called living trusts.
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Irrevocable trusts – Cannot be changed once created. The grantor gives up control over the assets.
Putting a property into a revocable living trust avoids probate, provides asset protection, and allows you to designate beneficiaries. It also allows for a smoother transfer of assets when you pass away.
An irrevocable trust provides even more asset protection and has tax benefits, but you lose control over the assets.
Can You Refinance if Your Property is in a Trust?
The short answer is yes, you can refinance a mortgage on a property held in trust, with some additional steps. Here’s an overview of how it works with each type of trust:
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Revocable Living Trust – Since you still control assets in a revocable trust, you can refinance the mortgage in your own name as an individual. The process is the same as if the property was not in a trust.
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Irrevocable Trust – You can still refinance the mortgage but the process is more complicated. The loan application has to be in the name of the trust, not yours as an individual.
The key is finding a lender who is willing and able to refinance a mortgage held in an irrevocable trust. This may require more shopping around to lenders who understand trust loans.
Overall, refinancing a property in a revocable living trust is straightforward while one in an irrevocable trust is more challenging but still possible.
Step-by-Step Process to Refinance Property in a Trust
Here is a step-by-step overview of what’s involved in refinancing a mortgage on property held in a living trust:
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Find a trust-friendly lender – Search for lenders familiar with refinancing trusts. Local banks and credit unions may be more amenable than big banks.
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Remove property from the trust (revocable only) – For revocable trusts, temporarily remove the property from the trust and put it in your personal name so you can qualify for the refinance as an individual.
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Apply for mortgage – If revocable, apply in your name. If irrevocable, apply in name of trust with trustees as borrowers.
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Get title search and insurance – The lender will require a title search showing the trust owns the home, and title insurance naming trust as insured.
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Close on new mortgage – At closing, the refinanced mortgage will be in name of trustees (irrevocable) or you as individual (revocable).
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Put property back in trust (revocable only) – For revocable trusts, transfer property back into the trust after closing so it continues being trust-owned.
While the process takes a few extra steps with a trust, it is certainly manageable with the right lender. The key is finding one familiar and comfortable with refinancing properties in trusts.
Tips for Refinancing a Home in a Trust
If you need to refinance a mortgage on property owned by a trust, keep these tips in mind:
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Shop around for a lender familiar with trust loans. Small local banks may be more flexible.
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Be prepared to have your attorney draft an opinion letter vouching for the trust’s validity.
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If revocable, temporarily take the property out of the trust for easier refinancing.
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Consult your attorney and trustees throughout the process.
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Review the trust document for any clauses about borrowing against assets.
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Be persistent and patient – the process may take longer than a normal refinance.
With some extra planning and effort, you can refinance a mortgage on property held in either a revocable living trust or irrevocable trust. The most important thing is finding the right lender who is comfortable dealing with properties owned by a trust.
Alternatives if the Current Lender Won’t Refinance a Trust Property
If your current mortgage lender refuses to refinance the loan because the home is owned by a trust, you have a few options:
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Shop around – Contact other lenders such as small local banks and credit unions who may be more flexible.
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Take property out of the trust temporarily – If a revocable trust, remove it from the trust, refinance as an individual, then put it back.
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Switch to a family member’s name – Have a relative co-sign or take out the refinanced mortgage in their name if possible.
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Pay down the loan principal – Make extra payments to get the loan balance low enough for the lender to approve a refi.
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Wait it out – If possible, wait until later when hopefully lenders relax trust rules or you can pay down more principal.
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Sell the property – If refinancing is not possible, you may have to consider selling the home to pay off the current mortgage.
With persistence and creativity, you can usually find a way to refinance a property held in a trust through alternate lenders, temporarily removing it from the trust, or taking other steps.
Common Refinancing Questions with Trust Ownership
Some common questions that come up when refinancing a property owned by a trust include:
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Do all trustees need to sign for an irrevocable trust refi? Yes, all trustees or successors typically have to be borrowers on the new mortgage.
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Does the trust document allow borrowing? Review the trust terms to ensure it allows encumbering assets with debt.
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Can the property be used as collateral? A lender may require the trust deed specifically allow the property to be used as security for a refinanced loan.
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What about title insurance? The lender will require a title policy naming the trust or trustees as insured.
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How long does a trust refi take? It typically takes 30-60 days longer than a normal refinance due to extra title work and documentation.
Key Takeaways
The main tips to remember are:
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It is possible to refinance property held in either revocable or irrevocable trusts.
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For revocable trusts, temporarily removing the property simplifies the refinance.
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Shopping around for the right lender familiar with trust loans is crucial.
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Involve your attorney and trustees throughout the refinancing process.
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Be prepared for a longer, more complex process than a normal refinance.
While refinancing a home or property in a trust takes some extra work, the benefits of trust ownership usually outweigh the small hassle of refinancing. With the right planning and lender, the process can go very smoothly.
Refinancing a mortgage on a property held within a trust is possible with revocable living trusts being the most straightforward. While irrevocable trusts are more difficult, an experienced lender familiar with trusts can handle the refinance. With proper preparation and persistence, homeowners should not be deterred from putting property into a trust solely due to refinance concerns. The protection and benefits of trusts far outweigh the small inconvenience of extra steps needed for refinancing.
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:
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.
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.
How to Refinance Property in a Trust
FAQ
Can I refinance a property in a trust?
We typically think of trusts in relation to inheritance or estate management, but they have other functions as well. It’s possible to refinance a property that’s in a trust, but the process has a few extra steps and you’ll need the consent of the trustor.
What are the disadvantages of putting your house in a trust?
| Disadvantage | Details |
|---|---|
| Expense | Setting up a trust is costlier than a will, requiring legal fees and administrative costs. |
| Ongoing Management | Requires continuous oversight, including retitling the property and updating beneficiaries. |
What happens to mortgage when property is in a trust?
Obligation Remains: Even after the property is transferred to the trust, the mortgage remains your responsibility. You must continue to make regular payments on the loan. Loan Terms Unchanged: The terms of the mortgage, including the interest rate and payment schedule, typically remain unchanged after the transfer.
Can I borrow against property in a trust?
… to encumber assets of the trust (obtain a loan) but traditional lenders will not lend against a property that is currently owned by an irrevocable trust
Can I refinance a property held in a trust?
While moving property to a trust means you no longer technically own it, you can still refinance property held in a trust. However, some conventional lenders can’t or won’t refinance a mortgage on a property held in trust. To work around this, you’ll have to temporarily move the property out of the trust and return it to individual ownership.
Can I refinance my home with an irrevocable trust?
Yes. An irrevocable trust restricts you from selling or financing the property value while you are alive. But a revocable trust is more flexible. As the trustee, you can refinance the home if the trust document anticipates the need. With mortgage interest rates currently very low, you might want to look into your refinancing options.
Can a trustee refinance a home?
As the trustee, you can refinance the home if the trust document anticipates the need. With mortgage interest rates currently very low, you might want to look into your refinancing options. Yet the mortgage on a trust property can make things somewhat more complex for a trustee who hopes to refinance a house with a more desirable loan.
Can you refinance a living trust?
A living trust is a revocable trust. And a revocable trust is a trust you can change — which means you can refinance. That said, your lender must be on board. Let’s take a brief look at how this plays out. Say you want to pass your home along to a specified person after you die.
Should you refinance a mortgage titled Under a trust?
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.
What happens when you refinance a home?
Once you do so, you can apply for a new refinancing mortgage on the property. Once you refinance, be sure to transfer your home back into a revocable trust. You’ll use a trust transfer deed to convey the title of your home to [Your name], Trustee of the [Your Name] Living Trust.