Definition
A trust deed, also known as a deed of trust, is a legal agreement involving a borrower, lender, and a neutral third party (trustee), where the borrower transfers the title of property to the trustee who holds it as security for the debt owed to the lender. On the other hand, a mortgage involves only the borrower and the lender directly, where the borrower offers the property as security for the debt but retains the title of the property. The main difference is essentially who holds the title of the property during the loan period: in a trust deed it’s the trustee, while in a mortgage it’s the borrower.
Key Takeaways
- A trust deed, also known as a deed of trust, involves three parties: a borrower, a lender, and a trustee. The borrower transfers the property title to the trustee, who holds it as a security for the lender. A mortgage, on the other hand, involves two parties: a borrower and a lender. The borrower gives the lender a lien on the property as collateral for the loan.
- In a trust deed, the trustee holds the power of sale, which means if the borrower defaults on the loan, the trustee can sell the property on behalf of the lender without a court order. In a mortgage, if the borrower defaults, the lender must go through the judicial foreclosure process to sell the property, which can take longer than the non-judicial process used in a trust deed.
- Trust deeds are typically used in ‘trust deed states’, while mortgages are used in ‘mortgage states’. The foreclosure process can vary greatly depending on which type of state you are in. In both cases, it is important for borrowers to understand their rights and responsibilities.
Importance
Understanding the difference between a trust deed and a mortgage is important for both investors and borrowers as they are two different mechanisms for securing a loan on a property. A mortgage involves two parties: the borrower and the lender, whereas, a trust deed involves an additional third party – a trustee.
In a mortgage, the lender has the right to seize the property if the borrower defaults on payments. On the other hand, in a trust deed, the trustee holds the title of the property on behalf of the lender.
If the borrower defaults, the trustee has the power to sell the property to recoup the loan without going through the court system, thus potentially making the foreclosure process faster. Therefore, the choice between a mortgage and a trust deed can significantly impact risk, efficiency, and control over the property for both parties.
Explanation
A Trust Deed, also known as a Deed of Trust, and a Mortgage are both utilized in the financial sector as a means to secure a loan on property. Essentially, they serve as an agreement between a borrower and a lender to give the lender some sort of security interest in the property until the funds borrowed are fully settled. While they primarily serve the same function, the governing systems in operation for disparate cases vary. It is important to recognize that your legal rights and the methods of property repossession should you default can vary depending on whether you obtain a trust deed or a mortgage.
A Trust Deed involves three parties: the lender, the borrower, and an independent trustee. In Trust Deed financing, the borrower transfers an interest in the property to this trustee, who holds it for the benefit of the lender. If the borrower defaults on the loan, the trustee can seize the property on behalf of the lender through a less tedious process known as foreclosure by trustee’s sale. On the other hand, a Mortgage involves only two parties: a borrower and a lender.
Here, the borrower retains the title of the property while he still owes the mortgage. If the borrower is unable to repay, the lender must go through a judicial foreclosure process and seek court involvement to take possession of the property. This process can be more time-consuming and costly compared to the Trust Deed method.
Examples of Trust Deed vs Mortgage
Property Buying: Let’s say Anne wants to buy a house but does not have enough money. She decides to get a loan. If she lives in a state like California, where Trust Deeds are commonly used, then a third party, usually a title company, holds the legal title of her property until she can pay off the loan. If Anne lives in a state like Florida where Mortgages are used, then the lender would have a claim on the property until the mortgage is fully repaid.
Foreclosure Process: If Anne were unable to make her loan repayments, the foreclosure process would begin. With a Trust Deed, the trustee has the power to do a non-judicial foreclosure, which is typically faster than a mortgage foreclosure. This can be beneficial for the lender as they can recover their funds faster. However, with a Mortgage, the lender has to go through the courts system to reclaim the property which can be expensive and time-consuming.
Re-financing a Property: John owns a property and decides he wants to refinance to get a better interest rate. With a Trust Deed, the legal title is held by the trustee, who must approve the refinance. With a Mortgage, John would need to obtain permission from the lender to refinance his loan. Furthermore, in most cases the refinanced loan may be viewed akin to a new loan which may involve re-origination fees and other associated costs, whereas with a trust deed, it could potentially be more cost effective for John.
FAQ about Trust Deed vs Mortgage
1. What is a Trust Deed?
A trust deed, also known as a deed of trust, is a document used in some states to acknowledge a loan agreement for a property. It includes three parties: the trustor (borrower), beneficiary (lender), and trustee (neutral third party). The trustee holds the title until the loan is paid off. If the borrower defaults, the property can be sold without a court foreclosure process.
2. What is a Mortgage?
A mortgage is an agreement where a borrower provides a lender an interest in real estate to secure the repayment of a loan. It involves two parties: the borrower and the lender. If the borrower cannot repay the loan, the lender has the right to sell the property through the court foreclosure process.
3. Which is better, a Trust Deed or a Mortgage?
Neither one is inherently better. The right option depends on your situation and where you live. Some states only allow one or the other. In a deed of trust, the foreclosure process can be quicker while in a mortgage system, the borrower often has more rights.
4. What is the role of the trustee in a Trust Deed?
The trustee in a trust deed holds bare legal title to the property until the loan is completely repaid. This means they can initiate and oversee the non-judicial foreclosure process if the trustor defaults on their loan payments.
5. Can a Mortgage turn into a Trust Deed?
No, a mortgage and a trust deed are separate legal instruments used for a similar purpose. They cannot convert into one another. However, they can be refinanced or paid off and a new agreement created as either a mortgage or a trust deed, depending on state law and lender preference.
Related Entrepreneurship Terms
- Beneficiary: The lender in the agreement, usually a bank or financial institution, that benefits from the trust deed or mortgage.
- Trustee: In the context of a trust deed, the trustee is a third party given the power to hold title to the borrower’s property until the loan is paid off.
- Mortgagor/Borrower: This is the individual or entity that borrows money to purchase or refinance a property.
- Foreclosure: This is the legal process by which a lender or trustee takes ownership of a property when a borrower defaults on their loan payments.
- Promissory Note: This is a legal document in which the borrower promises to repay the loan under agreed terms and conditions.
Sources for More Information
- Investopedia – A comprehensive website with a wealth of financial definitions and explanations, including an in-depth analysis on Trust Deed vs Mortgage.
- Bankrate – A popular resource for personal finance needs, offering lots of articles on financial strategies, including the pros and cons of Trust Deeds and Mortgages.
- NerdWallet – A user-friendly site that provides comparisons and explanations between different financial terminologies, tools, and strategies including Trust Deed and Mortgage.
- The Balance – A comprehensive financial advice site with easy-to-understand explanations on a range of financial topics, including the differentiation between Trust Deed and Mortgage.
