Mortgage is a type of loan that is used to purchase a home or any other property. A mortgage is a contract between the borrower and lender where the lender gives the borrower a sum of money i

There are various terms used in the financial instruments of a real estate finance industry. However, my discussion is mainly based on the Deed of Trust and mortgage. The two terms of financial instrument are both applied differently in the finance real estate.

Deed of Trust

First, a trust is a right to hold property, whether real or personal for the benefit of another. The parties involved comprise those who give the trustee the rights to hold the property in as a beneficiary trust. In case of a real estate trust, the trustor executes a Trust Deed, transferring the legal fee ownership held as a beneficiary to the trustee who holds it as a loan to ensure security between the borrower and the lender (Kothari, 2006). A Trust Deed is referred to as a Deed of Trust when it is used in financing real estate.

Deeds of Trust always have three parties involved. The borrower is the trustor while the lender is the beneficiary because he/she receives money from the borrower and always gains from the deal. The trustee’s only responsibility is to act as a watchdog of the lender, takes action whenever you default payment (Kothari, 2006). Your property is under the care of the trustee until you complete the payments. The Deed of Trust is essential to all the three, but under most circumstances, the lender and the buyer have a relative degree of the trust. It is important since the buyer is always afraid of losing the property and on the other side, the lender has nothing to lose.

A Deed of Trust is also essential because it assists in determining whether the Trust Deed established is valid and can be recognized by the court. It defines the legal purpose of the trust, determines the person to benefit from the trust and debate on whether it can be altered. The Deed of Trust clearly defines the terms and conditions of the trust, giving room for the amendment regarding the trust and state conditions under which it can be revoked.

Advantages

 Deed of Trust makes Payments single and affordable that is it enables the buyer to make a single monthly payment based on their affordability (Kothari, 2006). If they have many unsecured debts, it puts them back to control their finances for them not to borrow more to earn a living.

Secondly, a Deed of Trust writes off the borrower’s debts; the maximum period for Trust Deed payments is four years. Any outstanding debt that is unsecured after this period is written off. It enables you to keep an update on when the Trust Deed is to end including your debt.

Third, it protects the trustor from the creditors, for instance, once a Deed of Trust contract begins where the creditors have no authority to take any action against them with an attempt to collect their debts. Moreover, they have no rights to arrest them or charge a fee against their property. They are also not allowed to charge the trustor any interest.

Finally, it includes VAT debts and HMRC tax. In case one is running a business, a Deed of Trust is the best option in dealing with their debts because the HMRC approves a reasonable Trust Deed proposal and include any tax or personal VAT debt that they might have.

Disadvantages

The first one is Public listing where at the beginning of a deed of trust, the agreement may not be necessarily recorded in a local newspaper, but the borrower’s address and their name are recorded in the Scottish Insolvency Register, under the care of the Accountant in Bankruptcy. Anybody making research can see they are in a Trust Deed since the document is open, easily accessed via the internet.

Owners of the homes are obliged to releasing equity, and with this, homeowners have to give out a full percentage of their share in the equity attached to their property to increase the money repaid to the creditors. Property is valued at the beginning of the Trust Deed agreement since equity is unpredictable and can be made anytime.

A Trust Deed is somewhat inflexible because it is difficult to reduce the monthly payment once the Trust Deed begin. Creditors have to agree to any change. In case there are changes in circumstances, the Trust Deed agreement may be unsuccessful but the borrower will still be responsible for the debts, and you might end up bankrupt.

Mortgage

A mortgage is an example of a debt instrument where the specified real estate property is used as collateral to secure it, and where a borrower has an obligation to pay back in a series of payments. They are mostly used by businesses and individuals to acquire large real estate property without paying the entire value of the property at once. The borrower always repays the loan including the interest until he or she finally owns the property.  In case the borrower does not complete the payments, the bank can foreclose (Lang & Jagtiani, 2010). Unlike the deed of trust, a mortgage has only two parties involved, the lender (mortgagee) and the borrower (mortgagor). They depend on each other for success hence the mortgage arrangement is vital to both.

A mortgage is important because it allows a home buyer to a acquire one or have a new one built for them. Mortgages give payments to the seller directly and allow the borrower to choose a period of repayment for which they are comfortable. After all the payments are made, the borrower becomes the owner of the home. He can also decide to sell it off to another buyer before he completes the repayments so he or she would receive payments from the new buyer on a mortgage.

A mortgage is also an important source of fund for home improvements. Through the equity line of credit, a second mortgage allows the homeowner to make charges on the account, which is supported by home equity. The second mortgage exists alongside the first one and can be used to support improvements that add value to the home making it a comfortable place to live.

The secondary mortgage also assists in settling other expenses including medical covers, school fees among others (Lang & Jagtiani, 2010). Finally, it is a profit for lenders because the interest charged by the lenders mitigates the risk associated with lending a large amount of cash. In addition, it pays for account servicing and is a source of profit.

Advantages

A mortgage makes home ownership affordable; purchasing a home can be a bigger purchase, and a mortgage could be a big debt as well. However, spreading the repayments over a number of years makes the monthly payments affordable and manageable. Repaying a mortgage may drain your pay slip; therefore, one should go for a short-term mortgage based on their ability to repay which will make them mortgage-free sooner and save the cash that would otherwise be paid as interest.

Secondly, a mortgage provides for borrowing cost-effectively. Mortgage charges lower interest rates compared to other borrowings being that the borrower’s property is used as collateral for the loan. If you stop repaying, the bank has nothing to lose because it can sell part of the property to recover the loan.

Disadvantages

            However, mortgages also have shortcomings. For instance, the amount that the buyer eventually pays back is higher than the amount that they originally borrowed. It is also disadvantageous that one carries a large amount of debt over a long period. Another shortcoming is that it is secured to one’s property of which failure to keep up with the repayments may impose a risk to the property. Even though the monthly payments may seem manageable, the overall amount they pay over the years could be a lump sum.

References

Kothari, V. (2006). Securitization: the financial instrument of the future (Vol. 385). John Wiley & Sons.

Lang, W. W., & Jagtiani, J. A. (2010). The mortgage and financial crises: The role of credit risk management and corporate governance. Atlantic Economic Journal, 38(2), 123-144.