By Benny L. Kass
Saturday, November 1, 2008

Q: I am looking into refinancing my adjustable-rate mortgage to a fixed rate. During this process, my mother told me that she would lend me the $150,000 to pay off my existing loan and that I could pay her back at the current market rate for a 30-year fixed mortgage. This would provide her a stable investment and I could forego the closing costs, paperwork, appraisal, etc., associated with refinancing.

What are the legal implications of this transaction? If I pay off my current loan do I assume title? What paperwork do I have to sign with my mom to validate the transaction? Where do we file it? She would have to claim the income; can I still write off the interest as I would do with any other home loan? Is this transaction as simple as it sounds?

A: Yes, it is simple and makes a lot of sense. Instead of giving the money to a stranger (your new lender) you will be keeping it in the family. However, I strongly recommend that you retain a local lawyer to assist you, because there are a number of legal documents and administrative steps needed.

Start by sending a letter to your current mortgage lender asking for the amount that will be necessary to completely pay off that loan. The lender will send you a pay-off letter showing the current principal balance plus a per-diem amount. Interest is paid in arrears. That means that the payment you will send in November will cover interest for October.

If you pay off the loan in mid-month, you have to send in a check that includes the number of additional days until the lender receives your check. To be on the safe side, add three extra days of interest based on the per-diem amount that you receive from your lender.

Once you have the pay-off number, you sign a deed of trust and a promissory note in favor of your mother. It would make sense to have your lawyer prepare those two documents for you. The fee should not be more than $500. The lawyer will record the deed of trust on the land records where your property is located, and there will be a nominal fee that has to be paid to the recorder of deeds.

You asked about title. You currently own the property, but it is subject to a deed of trust (the mortgage document). This means that you have deeded the property in trust to a third party selected by the lender. If you are in default, the trustee has the power to sell your property at a foreclosure sale. For some examples, turn to the classified section of today's paper and you will see many properties being advertised for foreclosure sale by the trustee.

However, if you pay off the loan, the trustee will release the trust from land records.

The monthly payments you make to your mother have two parts: principal and interest. Your mother will have to declare as income the interest that you pay her. As long as the deed of trust is recorded, you can deduct that interest when you file your tax returns.

Your mother will have to send you and the IRS form 1098 at the end of each year, which will show the amount of interest that you have paid. You can find a copy at the IRS Web site, http://www.irs.gov; click on publications.

Your mother has made you an attractive offer that you should not hesitate to accept.

Benny L. Kass is a Washington lawyer. For a free copy of the booklet "A Guide to Settlement on Your New Home," send a self-addressed stamped envelope to Benny L. Kass, Suite 1100, 1050 17th St. NW, Washington, D.C. 20036. Readers may also send questions to him at that address or contact him through his Web site, http://www.kmklawyers.com.