Mortgage payoff or gift?

[Tara Yoder]

So my FIL (father in law) currently holds the mortgage to our home. We would like to do a cash-out refi and we have run into challenges because of the privately held mortgage. We need to know for tax purposes should he write a lien release to be filed with the county that the debt is paid off or would we be better off to have it drawn up as a gift? If it is gifted will that cause more challenges with the cash-out refi?  Thanks all