Most of us are used to calling our home loan a mortgage, but that is not an accurate definition of the term. A mortgage is not a loan, and it is not something that a lender gives you.
It is a security instrument you provide to the lender, a document that protects the lender’s interests in your property.
How does a mortgage work?
- There are two sides to a mortgage. You are a mortgagee or borrower, and the lender is a mortgagee.
- The mortgage document creates a lien on the property, which serves as a loan guarantee for the debt. The lien is recorded in public records, probably in your courtroom.
- The ownership cannot be transferred to someone else until you have paid the debt to release the lien.
- Even if your loan is secured by a mortgage, you still have full assets. No one else has ownership.
- A mortgage gives the lender the right to sell the secured property to repay if you do not pay the debt. The sales process is called overdraft.
- When a mortgage is used for security, the extent of the repayment must usually progress through the court system. This type of foreclosure is called foreclosure.
Deed of Trust
More than half of the states in the United States use mortgages as collateral. Other states use the trust that serves the same purpose, but with a few important differences.
- True trust is a special type of business that is recorded in public records, where everyone is told that there is a lien on your property.
- The trust certificate includes three parties. You are the creditor, the beneficiary is the beneficiary, and the third party is the creditor – someone who holds a temporary (but not full) title until the pledge is paid.
- The trustee should be a neutral third party, someone who will dislike neither you nor the lender if the problems escalate. In some states, attorneys act as trustees, and in other cases, insurance companies often provide the service.
- The commissioner cannot take your property for no reason – there are documents protecting it.
- True trust is canceled when the debt is repaid.
Differences between a mortgage and a trust
The differences between a mortgage and a trust only affect home buyers when foreclosure is a problem, as the trustee has the authority to sell the home if your loan becomes the default. The lender must provide confidential proof of delinquency and ask the trustee to initiate foreclosure proceedings.
The trustee must move forward as permitted by law and as dictated by your trust, but this process bypasses the court system, making it a much faster and cheaper way to stop the lender.
You cannot choose how your loan is secured, it is determined by where you live, but it is important to understand the type of pledge that provides debt for your home.