Trust Deed or Mortgage? Not Much Difference
Questions about equity-sharing, “wraparound” loans and the difference between a mortgage and a deed of trust recently arrived in the mail.
Journalists and even lenders tend to use the terms mortgage and deed of trust interchangeably. But, asks James Phillips of Los Angeles, “isn’t there a difference between the two?”
Yes, there is--but not much.
A mortgage is a legal contract in which the borrower, known as the mortgagor, pledges the house as security for a loan made by the lender, or mortgagee.
Title to the home is held by the borrower, but the lender is given a lien on the property as security for the loan.
A trust deed involves three parties: The borrower (trustor), lender (beneficiary) and a third person or entity known as the trustee.
The trustee holds title to the property until the borrower pays off the loan. When that happens, title is transferred-- reconveyed, in lenders’ parlance--to the borrower.
Several years ago, the rules for foreclosing on a borrower who had a mortgage and a borrower who had a trust deed varied greatly.
As a general rule, it was a lot faster for lenders to foreclose on a borrower who had a deed of trust than it was to foreclose on someone who had a mortgage.
But now, California legislators and most other state governments have changed their rules and brought more uniformity to the foreclosure process.
What does all this mean for borrowers?
“Not a whole lot, especially if you live in California,” said Glenn Sonnenberg, a partner in the Los Angeles-based law firm of Allen, Matkins, Leck, Gamble & Mallory.
“A lender can usually foreclose just as quickly on a mortgage as it can on a trust deed.”
Since trust deeds are more common than mortgages, Sonnenberg adds, the name of this column should be “Your Trust Deed” instead of “Your Mortgage.”
But it just doesn’t have the same ring to it, does it?
Several people who attended the recent Times’ Home Buyers and Sellers Fairs in Los Angeles and Orange counties asked about “equity-sharing"--buying a home with someone else.
Many wanted to know where to find companies that match people who want to invest in a home with buyers who want to own one. Others simply wanted to know where they could read up on the matter.
In one typical equity-sharing scenario, one person would agree to pay some or all of the monthly mortgage payment and another person--often a parent of the buyer--would agree to put up part or all of the down payment on the house.
Or, two unrelated buyers might want to pool their resources to buy a house that they couldn’t afford on their own.
Unfortunately, there’s really no clearinghouse for information on equity-sharing. Some realtors occasionally link up buyers and sellers, but you may have to contact several local real estate offices before you can find a broker who has experience in putting the deals together.
Among the Southland companies that operate formal equity-sharing programs are CoEquity Corp. in Costa Mesa, RealEquity in West Los Angeles and Fifty-Fifty Concepts in Encino.
If you’re thinking of using these or any other equity-sharing companies, you’ll want to scrutinize each of their contracts and find out how much you’ll be charged for their services.
Also look for any strings that may be attached to the agreement. For example, some companies that package equity-sharing deals require that you buy and sell the property through one of their real estate agents.
Such a restriction is fine, if the equity-sharing company’s sales agents are good and you don’t mind paying a commission for their services. But you’ll be unhappy if you get stuck with a bad agent, or if you want to sell your home yourself.
Of course, any equity-sharing agreement you enter should be in writing. You need to address how mortgage-interest deductions will be shared, when the property will be sold and a variety of other issues.
Since sharing your equity with someone else concerns such important tax and legal issues, it’s a good idea to consult a lawyer and tax expert before you enter a contract.
It also pays to read up on the issue. Three of the better books that explore equity-sharing are:
* “The IRIS Report on Equity Sharing” (Independent Research & Information Service, 2221 Barry Ave., Los Angeles, Calif. 90064; $33.95, including postage and handling).
* “Share and Grow Rich,” (Altaverde Publishing, 1125 Arbolado Road, Santa Barbara, Calif. 93101; $21.30, including postage and handling).
* “The Equity Sharing Book,” (Penguin USA, P.O. Box 999, Bergenfield, N.J. 07621; $10.45, including postage and handling).
An important part of all three of these books are sample contracts that you can use to fashion your own equity-sharing agreement.
Betty Richards, who reads this column in the Sacramento Bee, says that she and her husband are about to retire. They owe about $7,500 on their house, she says, and have enough money in the bank to pay cash for a new home in a retirement community.
Her question: “Our agent says we should think about selling and (letting the new buyer) use a wraparound mortgage, but I can’t really understand what it is. Can you explain?”
A wraparound mortgage really consists of two parts. First, there’s the existing loan on the property--in this case, the $7,500 that the Richards still owe on their home loan. If they sell using a wraparound, this loan would remain at its original rate and terms.
Then, there’s the wraparound itself. If the Richards sell their home for $100,000 and the buyer makes a $7,500 down payment, the wraparound would be for $92,500.
Now there would be two mortgages on the property--the $7,500 first loan and the $92,500 second.
The buyer would make a payment each month to the Richards, representing principal and interest on the $92,500 loan. In turn, the Richards would cash the check and use part of the proceeds to make the payment on their $7,500 first mortgage loan.
Generally, agreeing to sell your home with the use of a wraparound only makes sense if the rate that you’re paying on your current mortgage is lower than the rate you’d charge on the wraparound.
For example, if your first mortgage is at 8% and the rate that the buyer pays on the wraparound is 11%, you’ll come out 3% ahead of the game.
Conversely, you’d wind up 3% behind if you’re collecting an 8% rate from the buyer but paying the bank 11%.
Also remember that you can’t sell your house with a wraparound mortgage if your current loan has a “due-on-sale” clause. Such a clause requires that your loan be paid off in a lump sum if you sell the property.
If you’re not sure whether your loan includes a due-on-sale clause, check your original loan documents or consult your lender.