In this Ask Mike post, Mike answers the question “Can I refinance my home after putting it into a trust?”
Welcome to Ask Mike. I get asked a lot of questions when it comes to legal matters. In this series of posts, I’ll try to answer some of these questions. As with anything on the internet, this question and answer is general information and not directed at anyone in particular, not even the original questioner. Every answer presumes there are no other issues or facts that would make a difference. It is advised that you use this information as part of an enhanced discussion with an attorney capable of providing personalized advice in your jurisdiction. Again, I remind the reader that this website, including this post, is subject to a disclaimer that can be found at the bottom of the page.
Ask Mike: Can I refinance my home after putting it into a trust?
– Zoe M.
One of the biggest concerns about using a trust is the ability to use trust assets like you would have when you owned them personally. To answer this question, we need to look at two different types of trusts, revocable and irrevocable.
When people think of they typical trust designed to avoid probate, they are thinking of a revocable trust. A revocable trust is called that because it can be revoked at any time by the trust creator. This gives a lot of flexibility. If being in the trust would cause issues or if the trust needs to be changed, the assets can be taken back into the personal ownership of the creator.
With this trust, there is no problem in refinancing your home. To most major lenders, the typical revocable trust is treated the same as though you owned the home personally. They may need to review the trust document to make sure there are no issues with using the home for collateral, such as the inability to foreclose. Even if such an issue is discovered, the home can be taken out of the trust for the time necessary to complete the refinance, then returned after completion.
Irrevocable trusts are much less common and a very powerful estate planning tool. The power comes from giving the property away to the trust permanently. The creator of the trust does not have the power to get the property back. Typically, these trusts are used to achieve special goals, such as avoiding estate taxes, qualifying for Medi-Cal, or avoiding a disruption of government benefits.
With an irrevocable trust, most major lenders are very cautious. Their ability to foreclose on the home in the event of default might be limited. Some lenders refuse to lend on property held in an irrevocable trust as a matter of policy. Those that are willing to lend will charge higher interest rates. Unlike the revocable trusts, the home cannot simply be taken out of the trust during the refinance process.
As with most legal questions, the answer will depend on the details. Homes placed in revocable trusts can easily be refinanced while those in irrevocable trusts will have difficulty, if they can be refinanced at all. Fortunately, revocable trusts are the most common by far, especially if the goal is probate avoidance.
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