Deed of Trust vs Mortgage: What Are the Differences?
When the average American home costs $231,700, most new home buyers end up taking out a loan to afford it.
Since these homes are so expensive, there are specific home-buying loans you can apply for. These are either deeds of trust or mortgages. The state you live in will determine which one you will use.
Keep reading to learn more about the differences when it comes to a deed of trust vs mortgage.
What Is a Deed of Trust?
A deed of trust means the person who has borrowed money to buy a house is not the legal owner until they pay off their debt. This means there are more parties involved in this process than in a mortgage.
Here is a quick deed of trust guide for everyone involved:
- The borrower (also known as the trustor)
- The party legally holding the deed (also known as the trustee)
- The beneficiary (the party who loaned the money)
In this case, a person buying the house might take out a loan from a bank. But this doesn’t mean the bank owns the property, even though it initially paid for the property.
In the case that a person can’t pay back their loan, the trustee has the right to foreclose on the property. This means they can sell it and return the money to the beneficiary, which pays off the trustor’s debt.
The loan stipulations are outlined in the loan agreement or promissory notes. The beneficiary keeps these until the trustor pays off the loan. The trustor gets copies for record keeping.
Once the loan is paid off, the deed of the property is passed from the trustee to the trustor.
What Is a Mortgage?
The process of paying a mortgage is similar to that of a deed of trust, but with fewer parties involved.
Here is a mortgage guide for all the parties involved:
- The borrower (purchasing the home)
- The lender (usually a bank)
The lender holds the deed of the property until the debt is paid off. The mortgage rate and other relevant details will be recorded in the loan agreement.
If a person defaults on their loan repayments, then the lender has the right to start foreclosure proceedings. Foreclosure is a lot more complicated with mortgages, which is why some lenders prefer the deed of trust option.
The benefit of a mortgage is that you can liquidate some of that value when you need it. You can find more information here.
Difference Between a Deed of Trust vs Mortgage
The key similarity between a deed of trust vs mortgage is that both are financing options so people can buy properties. In both cases, the person who borrowed money does not own the property until they have paid off their debt.
The key difference between them is the number of parties involved, and the foreclosure processes.
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