You may have heard of a mortgage, but not all states use mortgages to document home loans in public records. Some states, such as California and Washington, use deeds of trust instead. Like a mortgage, a deed of trust documents a home loan against real estate. If you have a closed-end deed of trust, your deed of trust secures a home loan with a fixed term.
When you sign a closed-end deed of trust, you're actually transferring the ownership of the property to a trustee. The trustee is usually an escrow company, a title company, an attorney or a public trustee employed by local government. Once you finish paying off the loan, the trustee will transfer ownership back to you on a deed. If you don't pay, the home goes into foreclosure. Since the trustee has title, the trustee can transfer ownership back to the lender.
Unlike an open-end loan, which doesn't have a specific end date, you have to pay off a closed-end loan by the date set in your loan papers and shown on the deed of trust. For example, a 30-year home loan is closed-end, because you have to pay the loan in full by the 30-year mark. By contrast, a typical home equity line of credit is a revolving line without a set end date, a type of open-end loan. The actual deed of trust references your loan terms and identifies the lender, called a "beneficiary," the trustee and you, the borrower or "trustor." A description of your real estate, the property the loan covers, and the loan amount is also included.
With a closed-end loan, you'll pay a set payment each month. If you stick to the payment schedule exactly, you'll pay off the loan in full at the end of the term. An open-end loan, on the other hand, usually doesn't have a permanently fixed payment schedule. If you have taken out a home equity line of credit, for example, you'll make payments based on how your usage of the credit line. As you pay, you free up the line of credit for future use. A closed-end loan isn't revolving, so you don't free up any money from the lender when you make payments.
A deed of trust often allows a lender to skip a formal court process to take your house for nonpayment by using a process called "nonjudicial foreclosure." Your lender and the trustee will send you notices on a timeline outlined by your state's laws before the actual foreclosure and public auction of your home. In your closed-end deed of trust, there may be a clause that says the lender can take your home back if you don't pay, and your acceptance of these terms is your legal consent.
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