Why are mortgages so complicated part 2
September 9, 2020 6:33 PM   Subscribe

My family owns 50% of a property. We are buying out the other owner. Should we get a mortgage or a home equity loan to get the money? And what happens afterwards when we form a trust?

Last year I successfully got a mortgage on a house I bought. It was stressful but it all worked out. Now I have a situation that makes me even more confused.

SO my parents own 50% of a property that they have been living in for 30 years. NOW the other party wants us to buy them out. Fine, we've already agreed on the amount. We now have to come up with the funds through a combination of using money we have and getting some sort of loan.

Question A - should we get a mortgage or a home equity loan? Casual googling says you get a mortgage to buy a home and a home equity loan if you already OWN the home. But... we both own it AND are trying to buy it? So I dont know which to choose.

Question B is way more complicated - After this situation is resolved and my parents own the entire home, they then want to form a trust for me and my siblings and put the house in it. BUT if the house has a mortgage or loan on it, can they transfer it over to the trust? I was under the impression that if title transferred, the loans have to be satisfied.

I am trying to find an estate lawyer to ask all these questions of, so I WILL be asking an expert for advice. But it could take me a while to find one and we need to start planning things asap, because the closing is nigh. Any advice/anecdotes would be very appreciated!
posted by silverstatue to Home & Garden (9 answers total) 2 users marked this as a favorite
A) truly, you don't have to figure this out. Talk to a mortgage broker or your bank, and they will tell you the type of loan you need. Your particular situation sounds unusual, but this general fact pattern arises regularly in divorces and following death, where one heir may want to buy out the interest of another.

B) typically, people use trusts referred to as "grantor trusts" or "revocable trusts" for the kind of planning your parents seem to be contemplating. Those are trusts that the grantors/settlors of the trust have continuing rights to control, and would be alter egos of the grantors. Upon death, the trusts are the irrevocable owners of the assets and are managed in accordance with their operative documents (you can create irrevocable trusts prior to death, but you give up rights to control the assets and the trust then becomes a separate taxpayer). People sometimes use revocable trusts to manage for estate taxes.

Because the grantor trust is an alter ego of the mortgagor, banks don't generally have any issues with you transferring property, even if subject to a mortgage. You don't have to pay off the loan, though you often have to jump through hoops to establish that you're not going to defraud the bank.

An estate lawyer will not advise on question A), but could facilitate the transfer in question B)--that's routine work for them. Your parents will obviously also need the estate lawyer to draw up the trust agreement (and of course, it's a great opportunity to look at their overall estate plan; trusts can be very useful in general, because they can administer distributions of property without being put through probate (the necessary legal proceeding to administer a will)). However, a good banker or mortgage broker can help navigate the bank requirements for the transfer to a trust as well.

This is not legal advice, and I am not your lawyer. You should get tailored advice from a competent lawyer in your jurisdiction.
posted by Admiral Haddock at 7:05 PM on September 9 [3 favorites]

I applied for a home equity loan to buy my ex out of our house, and when the bank realized the situation, they insisted that I make it a mortgage instead. (But there wasn't a big difference in the process, just higher closing costs.)
posted by metasarah at 7:07 PM on September 9 [1 favorite]

What Admiral Haddock said, but instead of "Talk to a mortgage broker or your bank," check with a bunch of lenders. Rates vary even for cookie-cutter loans; with something a little unusual, definitely get a variety of offers.
posted by Mr.Know-it-some at 7:11 PM on September 9

A home equity loan is a mortgage. One of many types of mortgage You're trying to figure out the best type of mortgage for your situation. You need a good bank, credit union, or mortgage broker.
posted by medusa at 8:06 PM on September 9 [1 favorite]

You really need a lawyer to document this transaction. You say that closing is nigh and it might take you a while to find a lawyer - I would absolutely not close this deal until you have a real estate lawyer review the sale agreement. I would have a dozen questions about how this person owns 50% of the property - is this person on the deed, is there a formal agreement, or was this just an informal understanding, etc., etc. This needs to be cleared up in the transaction.

As far as a mortgage or home equity loan - I agree that you should get the loan with the best interest rate/term for your circumstances, regardless of the label.
posted by Mid at 8:10 PM on September 9

I have an attorney to oversee and review the actual transaction between us and the other party. I'm just trying to figure out how we will finance the money side of things.

I will absolutely ask a financial advisor, a mortgage broker, and a real estate attorney about everything! I'm just looking for info right now so I can ask educated questions.
posted by silverstatue at 8:16 PM on September 9

One question is if there is a mortgage on your parent's half of the house. They might find it easier and cheaper to pay off any current mortgages and get a new single mortgage that would be primary lien on the house.

In response to Mid's issue: you will certainly want (and the bank will probably require) title insurance on the purchase. This makes sure that your parents end up with a clean title (and if not the Title company takes on the burden of fixing it)

We have a revocable living trust - a minimal amount of paperwork to transfer title from us to the trust and our mortgage holder had no problem. More recently we bought a house and put it directly in the name of the trust. Eventually it will be become irrevocable (when one of us dies) and then the house will be owned by a new trust created out of the assets of our current trust but not by our heirs directly. In both cases, we had a normal mortgage although I'm not sure what happens if we die and the title changes from the current revocable trust to a new irrevocable one.

If your parents want to set up an irrevocable trust, separate from themselves, to own the house before they die, then you may find it harder and more expensive to get a mortgage since it is no longer owner occupied. Not sure why they would want to do that but I realize there may be reasons.
posted by metahawk at 8:29 PM on September 9

A mortgage and a home equity loan are both loans secured by the property. Mortgage is probably cheaper. Get whichever one is cheaper. Interview a few lenders. Ask the chosen lender and lawyer to advise on how to make the trust work.
posted by theora55 at 10:48 AM on September 10

I am a lawyer but IANYL. You are focusing on the wrong thing. This is just a question of terminology. As you pointed out, a mortgage typically refers to a loan for a property before you purchase it, and It is for the purpose of purchasing the property. A home equity loan means borrowing money after you have purchased the property, and the use of the cash could be anything. Either way it is a loan secured by the property, and the important point is the terms of the loan.

For the question of the trust, you definitely should ask an attorney but it is not “way more complicated”. The simple question is whether a property that has a mortgage on it can be put into a trust. This happens all the time and the attorney should be able to give you a simple answer.
posted by banishedimmortal at 3:59 AM on September 12

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