Anyone seeking to protect assets from probate court may set up a revocable trust. The grantor of the trust names a trustee to manage the trust's investments and property. On the death of the grantor, the assets pass directly to the beneficiaries named in the trust document. Many trusts include homes and other real estate; if the grantor wishes to refinance that property, he must follow guidelines set down by the mortgage company.
A revocable trust is one that the grantor can freely change or cancel during his lifetime. The Internal Revenue Service treats assets in a revocable trust as ordinary investments that are subject to income and capital gains taxes, as well as estate taxes when a grantor dies. Refinancing property means to negotiate a new or second loan on the property, often with terms more favorable to the borrower. As home values stagnate or fall, refinancing mortgages becomes more attractive to a borrower facing high interest rates, unmanageable monthly payments or "negative equity" -- a situation where the balance on the loan is greater than the market value of the house.
The Federal National Mortgage Association (FNMA), nicknamed Fannie Mae, invests in millions of mortgages, including those secured by trust properties. According to rules set down by the FNMA, property held in a revocable trust may be refinanced, subject to certain conditions. The property owner must create the trust during her lifetime, and must be one of the primary beneficiaries and trustees of the trust. The trust documents must specifically allow the trustee to take out mortgages on the property. In addition, the property must be the grantor's primary or secondary residence. The trustee must sign the promissory note; the trust must be liable for repayment and the property being refinanced must be used as collateral.
Not all lenders will extend loans to trust properties or allow you to refinance property in a revocable trust. Trusts that do not allow trust property to be used as collateral or security for a loan, for example, will be a problem for a lender. Lenders may require that you re-title the property, meaning take it out of the trust and return it to your personal ownership. You accomplish this by signing and recording the deed in your name with the county registrar or recorder. Once the refinance is complete, you can return the property to the trust by recording another deed transfer, this time into the trust. In most cases, an escrow or title company involved in the refinance will draw up the necessary documents for re-titling the property and then returning it to trust ownership.
A lender that allows the refinancing of trust property may require some extra steps and paperwork. This may include a warranty from a real-estate attorney that trust assets may be used for collateral on the new loan. Of course, you will have to pay for the time spent by the attorney in reviewing the trust documents to ensure this is the case, and then drawing up the warranty. The document as well as the trust terms will still be subject to review by the loan officer.
Founder/president of the innovative reference publisher The Archive LLC, Tom Streissguth has been a self-employed business owner, independent bookseller and freelance author in the school/library market. Holding a bachelor's degree from Yale, Streissguth has published more than 100 works of history, biography, current affairs and geography for young readers.