Mortgages are thought to be home loans used to finance the purchase of a home. The word mortgage has become a generic term used to refer to a loan secured by real property because most mortgages occur as a condition for new loan money. However a mortgage is not a loan. A mortgage is the document that pledges the property as security for the home loan.
The history of the word “mortgage” is very interesting and dates back to around 1350-1400. Used by old English lawyers, the first part of the word – “mort”- is from the Latin word mortuus which means death and “gage” which means a pledge to forfeit something of value if a debt is not repaid. A mortgage is literally a death pledge. This means the pledge dies, or ends, when either the obligation is fulfilled (paid) or when the property is taken through foreclosure.
A Mortgage Vs. a Deed of Trust
When purchasing a home, the property is pledged as collateral. A security instrument documents the pledge. In some states the security instrument is a Mortgage and in other states it is a Deed of Trust (DOT). Although they serve the same purpose as a security interest in the property, the mortgage and deed of trust have a few differences.
A mortgage is between two parties: a mortgagor and a mortgagee. The mortgagor is the borrower and the mortgagee is the lender.
A Deed of Trust is comprised of three parties: a trustor, a trustee, and a beneficiary. The trustor is the borrower; the trustee is an impartial third party; and the beneficiary is the lender. The trustee holds legal title to the property on behalf of the beneficiary.
Both a mortgage and a deed of trust are recorded in the local courthouse.
Both a mortgage and a deed of trust indentify the following:
- The parties: mortgagor and mortgagee; or trustor, trustee, and beneficiary
- Loan Amount
- Legal description of the property being used as security
- Inception and maturity date of the loan
- Riders such as adjustable rate riders, balloons, second home, etc.
- Provisions and requirements
- Late fees
- Escow accounts and mortgage insurance
- Legal procedures
- Acceleration, alienation, right to reinstate
Differences Exist in the Foreclosure Process
The mortgage gives the mortgagee (the lender) the right to sell the secured property through foreclosure if the mortgagor (borrower) does not pay the debt. The foreclosure must go through the state court system in states that have mortgages as the security instrument.
States that use deeds of trust typically have a non-judicial foreclosure process. In a non-judicial foreclosure, the beneficiary (lender) files a notice of default and can demand that the trustee (the impartial third party) begin foreclosure on the property. Foreclosure can occur without going to court if the Deed of Trust contains a power of sale clause.
Non-judicial foreclosures tend to be much quicker than judicial foreclosures.
Home Loans: A Promise to Pay
In generic terms, the word mortgage is used to refer to the home loan to finance the purchase of a home. Many people believe home loans are loans against your home. Yet in reality, a home loan is a loan against your income. Without income, you won’t qualify for the loan.
The promissory note is the contract that is signed with the lender that promises to repay the loan. The promissory note, or more briefly called the note, spells out the terms of the loan such as the amount, interest rate, duration, first and last payment dates, and so forth. Typically the note is not recorded. The note is not a mortgage nor is it a deed of trust. It’s simply a loan with a promise to pay.
Once money is secured for the purchase of a home, the lender protects the loan with either the mortgage or deed of trust. The home is collateral, or security, for the loan. If you don’t pay, you don’t stay…you lose the home via the mortgage death pledge.
When the home loan is paid, the promissory note is marked “paid in full” and returned to the borrower along with a recorded reconveyance deed which conveys the deed (ownership) to you, the homeowner.
The death pledge (mortgage or deed of trust) ends with the repayment of the promissory note.