Tuesday, December 14, 2021

What is a mortgage, really?


Does a mortgage always mean a loan?  Is it always associated with debt

The answer is NO!

A mortgage is just a security instrument.  What is a security instrument?  It's a contract (an agreement) that references another agreement, oftentimes this "other'" agreement is a promissory note, a loan; however, it doesn't always have to be debt.  Let's explore why you might use a mortgage as a tool for your real estate investment business. 

OK, let's back up a second.  A mortgage, is just one type of security instrument.  Some states are deed-of-trust states and some states are mortgage states.  Let's use the generic term of security instrument, so we can talk in broader terms.   What's the point of a security instrument?   The security instrument is a recordable (on public record) agreement which stipulates what the parties agree can happen if the terms of the other referenced agreement is violated .  For example, if the promissory note (the other referenced agreement within this security agreement), goes into default, then the mortgage holder can foreclose (for example).

The security agreement (mortgage or deed of trust) will spell out the recourse and rights of either party.  Usually foreclosure is the remedy; however, there can be other remedies which can get creative and extend beyond the property in question.  For example, an option could be executed secured with a mortgage, and if the option is violated (for example maybe the taxes were not paid by the occupant or some other provision of the option is not upheld), then the option holder could enforce the the terms of the mortgage, which may include access or rights to another property, or some other "specific performance" (often called a performance mortgage).

Keep in mind, the person who is signing the security instrument is the fee-simple owner of the property.   As the owner, you are agreeing (granting) the mortgage holder permission to do all these things.  It's a powerful tool, and one that can be used to secure a lease, an option, a loan, or some other agreement (i.e., property management agreement, purchase agreement, occupancy agreement, lease-back, etc).

Can you think of how you might use this to secure your agreement, beyond a promissory note?   Leave a comment with your ideas.