Perhaps you've heard the phrase "the bank owns it" in context of a house purchased with a mortgage loan. Although the buyer owns the home, the mortgage lender holds an interest in the property until the loan is paid in full. This occurs because the home itself acts as collateral to secure the loan in case the buyers default on the loan. After the loan is paid in full, the lender will issue a release of mortgage document. This removes the lender's interest in the property and the buyers then own the home free and clear.
Understanding Mortgage Basics
Mortgage loans are used to finance the purchase of homes. Borrowers qualify for mortgages with good credit scores and steady incomes. When a mortgage loan is finalized, or closes, the borrowers are required to sign several documents. One of these is the mortgage, also known in some states as a deed of trust. The mortgage document explains the terms and conditions of the loan, such as the amount borrowed, the repayment term, interest rates and penalties for non-payment.
Creation of a Mortgage Lien
After the mortgage document is signed, it needs to be filed as a public record. Typically, the county clerk or county recorder handles this job. Once it's recorded, the mortgage also acts to place a lien against the property in favor of the lender. The lien is what gives the lender permission to foreclose on the property if you fail to meet the loan requirements explained in the mortgage. Other types of liens can also be attached to a mortgage. A voluntary lien, which is placed with the homeowner’s consent, may be attached to a mortgage when the home is used as collateral for some type of loan or line of credit. An involuntary lien may be attached without the homeowner’s consent for outstanding debts such as property taxes, credit card debt, personal loans and medical bills.
Recording the Discharge of Mortgage
The mortgage lien remains active until the mortgage is paid in full. At this time, the lender creates the release of mortgage document, also known as the discharge of mortgage, which declares that the loan is paid off. The release includes the basic information listed on the mortgage document, such as the date it originated, the borrowers' names, the mortgage lender and the total amount borrowed.
The release is sent to the county clerk or recorder to be filed on record as well. Any subsequent title searches will show the mortgage and then the release. The mortgage lender no longer holds any interest in the property, because the borrowers have fulfilled their repayment obligations.
Release of Mortgage Considerations
If a borrower falls behind of mortgage loan payments, the lender has the option of beginning foreclosure proceedings. To avoid the credit hit caused by foreclosure, the lender may allow the borrower to complete what is known as a deed in lieu. This transaction allows the homeowner to transfer the property title back to the lender and walk away from the home in exchange for a release from the obligation of repaying the loan.
A release of mortgage will also appear when a refinance loan is used. This occurs because the new loan completely pays off the old loan. Therefore, in this scenario, three documents will be recorded: the original mortgage, the release of the original mortgage and the refinance mortgage. Another point to consider is that adding or removing an individual as an owner by using a quitclaim deed will not affect the mortgage loan. If one owner who is also on the mortgage is taken off of the title, the lender does not issue a release of his mortgage repayment responsibilities.