Published: Sep 19, 2022 | Updated at: Sep 21, 2022
Are you planning on buying a new home?
Buying a new home is exciting, fun, and the start of many new adventures. However, the world of home ownership can be daunting and overwhelming - particularly if this is your first time.
If you're wondering about a deed of trust vs a mortgage, don't worry, we're here to help! We will take you step by step to understand what is a deed of trust and what is a mortgage.
Keep reading for an in-depth guide to understanding these two key elements of home ownership.
What Is a Deed of Trust?
An agreement known as a deed of trust binds three parties to a real estate transaction. In exchange for one or more promissory notes, the lender lends the borrower the money to purchase the house, and the trustee retains title to the house until the loan is repaid.
A trust deed includes a trustor, beneficiary, and trustee. The purpose of the trust is to give the lender recourse so that, in certain situations outlined in the trust, they can force the trustee's hand when it comes to selling the property or repaying the loan at a faster rate. The trust effectively serves as a security, where the borrower pledges to repay the debt.
Typically a deed of trust record is recorded with the county clerk- just like mortgages. However, not all states even permit a deed of trust document to secure real estate. So depending on your location, this may not be an option for your real estate ventures.
In some states, a deed of trust is a substitute for the conventional mortgage procedure. States typically employ either a deed of trust or a mortgage, not both, however, there are some exceptions.
Who Is All Involved in a Deed of Trust?
A deed of trust is a unique real estate document because it involved three distinct parties. When a trio chooses to adopt a deed of trust the trustor, beneficiary, and trustee are tied together until the loan is repaid.
The original owner of the assets being transferred into the trust is known as the trustor. We're referring to the borrower in a real estate deal. Their property's official legal title is transferred to the trust.
As long as the borrower complies with the terms and conditions of the trust, the borrower still maintains equitable title. This is even though the legal title designates the actual ownership of the property and is held in the trust.
Having equitable title entitles you to receive the advantages of property ownership, regardless of who is currently in possession of it legally. You have a right to reside there and acquire equity in it, among other things.
The individual or organization whose investment interest is being safeguarded by the deed of trust is the beneficiary. This is typically the lender. The deed of trust serves as the lender's assurance that you will repay the debt in return for them lending you the money for the property.
The trustee's responsibility is to hold the title in actuality while the payments are being made. The trustee is expected to act impartially and refrain from taking any actions that will unfairly favor either party.
If the loan is fully repaid, the trustee is who will dissolve the trust and transfer the new legal title to the trustor. The trustee will also give the beneficiary the proceeds of the sale if the trustor decides to sell the property before the loan is paid off.
The Benefits of a Deed of Trust
Because a deed of trust often enables a quicker foreclosure on a residence, it might be advantageous to the lender. The majority of trust deeds contain language that allows for "non-judicial foreclosure". This stipulation frees the lender from having to wait for the court system to evaluate and authorize the foreclosure procedure.
By entering into a third-party agreement, you can feel confident that you aren't being strong-armed or swindled. Trustees should be unbiased third parties that can ensure a smooth transfer of assets.
The Disadvantages of a Deed of Trust
The downside to a deed of trust is that the trustor still maintains legal control over a property until the loan is fully paid off. If you are eager to buy a property through a deed of trust, and the trustor decided during the payment process to sell you have no legal rights to block the sale.
How Does a Mortgage Work?
A mortgage is an agreement to use real estate as security for a loan. When you took out a loan to buy your home, you probably either signed a mortgage or a deed of trust, which is comparable to a mortgage.
Mortgages are long-term loans that are taken out to buy a home or other major assets. When you obtain a mortgage, you make a commitment to pay back the borrowed funds with an agreed-upon interest rate.
The house serves as collateral, so if you break your mortgage agreement the lender has the right to seize your property. Your loan doesn't become a mortgage until it is registered as a lien on your house. At this point, you are no longer guaranteed ownership of the property unless you make timely payments.
Mortgages vary based on the details outlined in the promissory note. This section of the mortgage will outline your agreed-upon interest rate, total loan amount, and term of the loan. These details are invaluable when it comes to building a schedule for your loan repayment.
The Benefits of a Mortgage
Entering into a mortgage agreement can be great for your credit score. Making consistent monthly payments on a mortgage can help you maintain or raise your credit score and show that you are able to routinely pay off your debts. A mortgage is frequently regarded as a "good" debt to carry, or at least one that is worthwhile.
It is incredibly rare that people can place an all-cash offer on a home. This is because a home is a major expense that costs thousands of dollars, with a mortgage you can slowly build equity and have money available for other financial goals.
You may require a sizable chunk of money if you want to pay off your mortgage early. You can utilize that money for other, possibly more beneficial objectives or aims if you continue to make your mortgage payment on time each month.
You can deduct mortgage interest as long as you're currently making payments on your loan. This can help cut the cost of your monthly expenses if you are eligible for certain tax benefits.
The Disadvantages of a Mortgage
Many people aim to be fully debt-free. It can be unsettling for some borrowers to take on such a significant obligation as a mortgage. Without a standard paycheck to rely on many people are fearful of the repercussions of falling behind on mortgage payments.
Your monthly mortgage payment includes an amount for interest. Given that it isn't being used to pay off the mortgage itself, some people may consider that to be money squandered. If you have the means to purchase assets without a mortgage you can save yourself the sum of your monthly interest.
Very few mortgage offers come with a "fixed rate". Typically interest rates will fluctuate based on the state of the economy, this is not something that you can project when signing on to a 20-year to a 30-year mortgage. Without a fixed-rate mortgage, you run the danger of having your loan's interest rate rise over time.
Comparing a Deed of Trust vs Mortgage
Typically you have no choice as to whether you enter into a deed of trust or mortgage agreement when buying a home. These two legal agreements are typically decided based on state and local normalities.
If you default on your house loan, it might be preferable from the borrower's point of view to have a mortgage. In general, judicial foreclosures take substantially longer than non-judicial ones. This will give you more time to remain in the home without making payments.
From a lender's point of view, a deed of trust is a better option because foreclosures can happen rapidly. If the borrower stops making payments, you can quickly remove them from the home and re-size the property.
Buying a New Home With Financial Securities
Navigating the real estate market can be extremely scary, especially if you are unfamiliar with the financial securities that surround buying a home. Once you understand what is a deed of trust and mortgage is, you will be able to better understand what kind of financial obligations you are signing onto.
When it comes to deciding between a deed of trust vs mortgage, lean on a real estate and financial expert for counsel. Contact us at Halsell to organize your financial situation and accelerate your home buying.