You may have heard people say "the bank owns my house" -- or some similar phrase -- when referring to their mortgage payments. Phrases like this are partially true, because while there is a balance on your mortgage loan, you do not own the property free and clear. Mortgage lenders used your property as collateral to fund the loan. By placing a lien on the property, via a mortgage document, they secure the promise to repay the loan.
After you have been approved for the loan, everything is finalized and signed at the closing. The lender's security instrument is called a mortgage or deed of trust, depending on what state the property is located in. The security instrument acts to prove that you have promised repay the loan according to the terms and conditions explained within the document, or face penalties or foreclosure. The difference between the two types of security instruments is that a mortgage acts to place a lien on the property being mortgaged, while a deed of trust holds the property in a trust. A mortgage lien acts to give the lender permission to foreclose on the property if the terms are violated. The trust is controlled by a third-party trustee who will act on behalf of the lender to initiate a foreclosure, if warranted.
Two parties are concerned with the mortgage: you and the lender. The mortgage document, which is usually around 10 pages long, specifically defines and explains the terms of the loan. This includes information regarding the principal amount borrowed, the maturity date and when interest rates will change, if applicable. Different lenders may have slightly different versions of the mortgage documents, and a mortgage's terms might vary state by state. By signing the mortgage, you agree to all of the terms explained within it.
While foreclosure laws are specific to each state, generally, properties secured by a mortgage are subject to judicial foreclosures. When you are in default, as defined by the mortgage, the lender can initiate foreclosure. To do so, the lender actually has to file a lawsuit to proceed with the foreclosure. In contrast, when a deed of trust is used, the lender typically doesn't have to go through the judicial system. In either case, the lender must follow the state's foreclosure process diligently to successfully foreclose on a property.
Once the lender receives your final mortgage payment, the loan is considered paid in full. At this time, the lender will create a satisfaction of mortgage -- also called a release -- document stating that you have fully satisfied the terms and conditions of the loan. The satisfaction is then sent to the county recorder where the original mortgage document is filed also. The satisfaction acts to remove the lien created by the mortgage, and you will then own your property free and clear.
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