Misunderstood Mortgage and Finance Concepts

Deed of Trust vs. Mortgage. The confusing terminology involved in mortgage transactions can present a hurdle for some buyers and private lenders. In short, a “deed of trust” is a substantially similar document to a “mortgage.” Laws vary from state to state, and unique terminology follows unique laws, but in large measure a deed of trust is synonymous with mortgage. Missouri is accurately categorized as a “deed of trust” state, where this document is used in lieu of a mortgage. In practice, a deed of trust is essentially a mortgage, granting a security interest in certain real estate to the lender. A deed of trust is typically executed only by the party granting the mortgage (i.e. the borrower).

Future Advances Provision. Many deeds of trust (i.e. mortgage documents) contain a “future advances” provision. Borrowers and lenders should understand the meaning and applicability of this important language in the deed of trust. When included in a transaction, this contractual provision grants the lender/bank a security interest in the named real estate—as security not only for the loan initially agreed upon, but also with respect to any amounts loaned in the future to the borrower. In short, the lender/bank is given a secured mortgage interest with respect to all amounts that it may loan to the borrower in the future. This provision provides a critical benefit to a lender/bank, providing additional security in the event of borrower default and constitutes a potentially substantial burden to borrowers. Missouri law requires that, in the event that such a provision is contained in a deed of trust, a notice of such be provided at the top of the front page of the deed of trust.

Deed of Release. As discussed above, a deed of trust (i.e. mortgage) represents a security interest in favor of a lender/bank, essentially guaranteeing repayment of a loan made to a borrower. Upon the closing of the initial loan transaction, the deed of trust should be recorded with the local recorder’s office. Once the applicable loan is paid back in full, the deed of trust becomes unneeded and unenforceable. However, the deed of trust remains recorded with the recorder’s office and represents a potential cloud on the owner/borrower’s title. A “deed of release” releases the deed of trust and provides notice that it is no longer applicable to the real estate. Pursuant to Missouri law, the secured party (i.e. lender/bank) must provide the borrower with a deed of release within 15 days of the loan being repaid and the borrower requesting a deed of release (see 443.130 RSMo).