Mortgages and Security Agreements—The Establishment of Collateral

When a lender advances money to the purchaser of residential or commercial real estate, two documents are executed with respect to the repayment of those funds:

  • A promissory note sets forth the terms of repayment—how much interest will be paid, how many years the borrower will take to pay off the loan, and the principal amount being financed. Typically, the payments are “amortized” over a number of years, with the borrower paying the same monthly payment, but with a greater portion of the earlier payments being applied to interest.
  • A mortgage or deed of trust—A mortgage or deed of trust establishes a lien on the real property purchased. The lender holds the lien and has the right to enforce the lien, should the borrower default on the note. In most instances, when the borrower defaults on the note, the lender will have the right to accelerate the loan. If the borrower cannot bring the loan current, and the parties cannot restructure the loan, the mortgage customarily gives the lender the right to foreclose. Foreclosure is a formal legal process that typically ends in a foreclosure sale, where the property is sold at auction and the lender has priority to the proceeds of sale.

The mortgage or deed of trust identifies the borrowers, and provides a legal description of the property, as well as the common street address.

At the closing, the borrower signs the mortgage, which is then recorded in the public land records, so that potential buyers can be put on notice that it exists. Once the note on a home is fully paid, the lender will file a release of mortgage.

A deed of trust accomplishes the same objective as a mortgage, but in a different way. With a mortgage, the purchaser receives a deed, subject to the mortgage. With a deed of trust, the lender holds the deed until the purchaser has made all payments, then conveys the deed to the property owner.

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