Real Estate Investing - Real Estate Mortgage

Like most people, you may think you understand what a mortgage is but do you really understand how a mortgage works?

A mortgage, aka a deed of trust, is simply the recording instrument used to prove that you borrowed money. When this happens, there is a transfer of an interest in the property and while it is tied to the repayment due by the note, it is not a promise to pay. The promissory note is that element of the transaction. With an unsecure note, there is a simple agreement to repay without collateral or security for the money loaned. The secure note will have something backing the loan, such as a house, car, boat, or other funding. The mortgage itself is not the promise to pay the debt.

Here are the basic elements of a mortgage:

Provides the security for the loan
Names of the borrowers
Property address
Legal description of the property
Must be recorded in the county or town

When you sign the agreement for a mortgage, you have to already own the property in order to provide it as collateral for the lien. This is why you will go to a title office and sign everything at the same time. It places a lien on the property until the note is paid and you will not be able to sell it or convey it to another party without clearing the note to pay on the property.

The promissory note basically states you are borrowing a certain amount of money that you promise to repay within a certain amount of time. Essentially though, it is just a promise without any way for the lender to enforce it or to recoup their damages, but with a mortgage, that changes. The mortgage pledges ownership in the property as a means of security, rendering the promissory note secure. It will state the legal description and an agreement to pay the note on time and in the correct amounts or the lender can accept the property as payment for the balance due.

Figuring out the Mortgage

Don’t confuse a note with a mortgage as a mortgage doesn’t exist without a note of some type. The mortgage makes your note easier to enforce and while the lender will still need to take action in order to reclaim their payments, there is something to claim. When your mortgage is paid in full, the promissory note disappears and the lender, obviously, loses their right to take away your home for non-payment of the loan. You then receive a title, allowing you to own the property, free and clear.