Before You Refinance Your Home, Consider This

The relatively low interest rates Americans are seeing has led many homeowners to take a second look at their mortgage loans. If you own a home, now could be a good time to see if you can get a better deal on your mortgage rate. If your house is in a living trust, though, make sure that you have approval from your lender before pulling the trigger.

Many mortgage lenders are now requiring homeowners to take their houses out of their living trusts before refinancing with a different loan. The reason for this? Plenty of lenders believe that it will be difficult or impossible to foreclose on a house that is titled in a living trust. You might be able to find a lender that doesn’t require you to take your house out of a living trust in order to refinance. However, it could very well be worth the trouble if it makes financial sense for you and your family. Don’t forget to place the house back into the living trust, though.

Due-On-Sale Clause

In decades past, homeowners could not retitle their houses into living trusts without triggering a due-on-sale clause. This clause, which is found in the terms of many mortgage loans, requires the balance due on a mortgage to be paid when the house is sold or any ownership interest in the house is conveyed to another party. As of 1982, though, homeowners are free to place their homes in living trusts (and take their homes out of living trusts) without worrying about triggering the due-on-sale clause.

You might not be able to enjoy this protection if, say, you are transferring your home (or other real property) into an LLC or other business — even if the business itself is owned by a living trust. As a result, you should make sure your lender approves of the refinancing before you touch your home’s title.

Other Important Considerations

There are discrepancies between the 1982 federal law that protected homeowners with homes in living trusts and the implementation of that law. Without getting too deep into the topic, you should be extra careful when placing a “dwelling” with more than five units into or out of a living trust. It could also be prudent to make sure the living trust’s beneficiary is an occupant of the house.

Lastly, you should strongly consider getting title insurance before transferring title of your house. This applies when selling your home in addition to placing a home into a living trust. Title insurance can provide coverage if you suffer financial loss due to a problem with a title or mortgage lien. Most lenders require it, and it is otherwise an invaluable asset.

The Browne Firm helps clients save money and preserve wealth by helping implement creative estate planning strategies. However, our team is able to do so thoughtfully and carefully so no stone is left unturned. We also offer flat-fee billing to help meet your legal needs. Call us at 914-685-6935 to set up an appointment to speak with our legal team.