15 Jan What Is the Difference Between a Mortgage and a Deed of Trust?
Everyone knows what a mortgage is–it’s the document giving a bank collateral for the loan used to buy your home and letting it foreclose if you don’t pay. But here in Maryland (and a number of other states, like California), we don’t see mortgages very often. Instead, lenders use something called a “Deed of Trust”.
What’s the difference between a mortgage and a deed of trust?
To explain, it’s important to understand the way mortgages and deeds of trust (or DOTs) deal with the title to your home. In some states, a mortgage actually gives the lender title to the house, and the borrower–you–gets legal ownership back only after the mortgage is paid off. In other states, the mortgage only creates a lien on the property, and you keep title, with the lien being removed after the mortgage is paid off.
There are two parties to a mortgage, the lender (bank) and the borrower (homeowner). In a DOT, there are three: the lender, the borrower and a trustee. The trustee actually holds legal title to the property for the benefit of the lender until the loan is paid, so neither the bank nor you are the legal owner while the DOT is in effect. (You have what is called “equitable title” to the house, which gives you the use, benefits and enjoyment of the property.)
Why would a lender use a DOT instead of a mortgage? One reason is tradition. A Maryand lender uses a DOT to make a home loan, in part, because everyone else in Maryland does. A Florida lender uses a mortgage for the same reason. But the main reason is speed. Speed in foreclosure, that is. Generally, DOTs allow for a faster foreclosure time than the judicial foreclosure required with a mortgage.
Be careful not to confuse a deed, which transfers title and is evidence that you own real estate, with a Deed of Trust, which is used to provide collateral for a loan and allows foreclosure if you don’t pay.
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