Even though most people who own a home financed it through a bank, credit union or mortgage lender, few people really understand how mortgage law works. After reading this article, you will not fall prey to any of the three common misconceptions that people have about mortgages.
"I pay my mortgage each month"
If you buy a new home or other type of real estate and finance the purchase, the chances are that you will be asked to sign a mortgage document. The mortgage, however, is not the debt. You do not make monthly mortgage payments even though you might refer to them in that way.
The payments you make each month for the next 15 or 30 years are applied toward the loan you took out to finance the purchase. One of the first documents your lender had you sign before giving you the money to purchase your home was a promissory note or, as it is called in some parts of the country, a bond. The note represents your personal promise to repay the debt.
The promissory note is the document in which you will find the following information about your loan:
- The names of the borrower and the lender
- The address of the property
- The amount borrowed
- The interest rate charged by the lender
- The amount charged if a payment is late
- The length of time over which you will repay the debt
- Other terms of the loan
If you do not pay the debt, the holder of the note has the right to sue you to obtain a judgment for the outstanding balance.
"The bank owns my home until I pay my debt"
Because of the large sums of money involved with most real estate financing, lenders want additional security besides the promissory note in which you personally commit yourself to repaying the debt. This is where mortgages come into play.
A mortgage is a document that you sign right after signing the promissory note. The mortgage makes reference to the note and contains language by which you agree that the lender may foreclose on your property if you fail to repay the debt as agreed in the note. The mortgage document is recorded with the county clerk where the property is located as a lien against the property for the original principal balance of the loan. A mortgage does not give the lender ownership rights to the property.
"The bank holding the mortgage has to agree before I can sell my home"
As the owner of your home, you have the right to sell it whenever you wish. All the lender can require is that you pay the balance of your debt before the lien created by the mortgage is released. When a loan is paid in full, the lender holding the mortgage files a satisfaction of mortgage with the county clerk removing the lien and allowing the transfer of clear title to the property to the new owner.
Mortgage law can be complex and differs from one state to another. Your best source of information about mortgages is an attorney with experience handling real estate transactions.