Mortgage vs Lien, what’s the difference?
Hudson Valley Carpenter
| Posted in Business on
I’ve recently been told that a home equity loan with a lien gives the lender the same right to foreclosure as a mortgage. Is that always true or does it depend on how the contract is written?
Replies
nothing is an "always" but "home equity loan" implies that they have taken a stake in the part of the home you own... so yes they can foreclose for non payment... if you are current in your 1st then usually that makes you in default on that also... (it's usually in the fine print of the first).... what you have in a home equity loan is a SECOND mortgage... which is what they use to be called.... "a second" but home equity has a much nicer ring to it...
p
Yeah, it used to be only crooks and high-rollers (is there a difference?) took out a "second mortgage", but everyone and his uncle are getting "home equity loans".
The mark of the immature man is that he wants to die nobly for a cause, while the mark of a mature man is that he wants to live humbly for one. --Wilhelm Stekel
you noticed too... i always found humor in the renameing... weird how "second mortgage" put forth an image of those that couldn't pay their bills...
p
Yeah, and they still can't pay their bills.
The mark of the immature man is that he wants to die nobly for a cause, while the mark of a mature man is that he wants to live humbly for one. --Wilhelm Stekel
The home equity loan is the result of the 1986 tax bill. That is when consumer interest stopped being deductible on your federal taxes. The home equity loan became a way to buy car or pay off your Visa bill and deduct the interest. Unfortunately, miss a car payment, lose your house.
When they decided you could borrow 125% of the equity in your home it set in motion the mess we have today.
Yeah, it's a big part of the current mess.
The mark of the immature man is that he wants to die nobly for a cause, while the mark of a mature man is that he wants to live humbly for one. --Wilhelm Stekel
"Yeah, it used to be only crooks and high-rollers (is there a difference?) took out a "second mortgage", but everyone and his uncle are getting "home equity loans".What? Second trust deeds were commonly used when primary loans were only available for 80% of value. Lots of first-time homeowners and small rental property investors used them as well as homeowners who wanted to borrow against their equity to remodel or whatever.BruceT
Not where I came from. If someone took out a second mortgage they didn't talk about it.
The mark of the immature man is that he wants to die nobly for a cause, while the mark of a mature man is that he wants to live humbly for one. --Wilhelm Stekel
That was back in the days when the goal was to pay off your house. For the last 2 decades the goal was to "leverage" it, to suck the most equity you could get from it and spend every dime of the money.
Yep.
The mark of the immature man is that he wants to die nobly for a cause, while the mark of a mature man is that he wants to live humbly for one. --Wilhelm Stekel
Thanks. That make better sense to me, now that you bring the past definitions into the present.
A lot of times they are used to express the same thing. But, you can have a lien on a piece of property without having a mortgage against the property. Having a mortgage against a piece of property means you borrowed money using that property as collateral. A lien can be placed by the court on a piece of property for other debt that has been defaulted on.
If a bank with a 2nd mortgage on a property wants to foreclose, then they have to "buy out" the 1st mortgage holder to take back the property. Likewise, if you have a 2nd mortgage and the 1st mortgagor is going to foreclose, the 2nd bank has to either buy out the 1st mortgage or purchase the property at the foreclosure sale to protect their interest. (only if they think there is sufficient equity to do so) If they don't want to do that, then they can put a "lien" on the property to cloud the title and try to recoup some money when the property is sold.
One thing to remember is government liens usually trump the 1st mortgage. If this property is really in default for a while and the owner wasn't paying taxes, mowing the grass or other code enforcement issues there might be a huge government bill. They are slamming properties with $100 or more a day fines and outrageous mowing bills here that can quickly gobble up the residual value in a home. Cash pressed cities say they won't budge on that bill.
Typically, the first mortgage holder is not being paid either, and they will act first. The second holder waits and gets the leftovers, but doesn't have to do any of the work.
You're right about the 1st mortgage holder probably not being paid either. But, if the 2nd mortgage holder does nothing and just waits, as you suggest, they are totally left out in the event the 1st mortgage holder forecloses and the house is sold.
For example, house is worth $200K, 1st mortgage holder has $120,000 mortgage, and 2nd mortgage holder has a $60,000 2nd mortgage. Both loans aren't being paid and are in default. 1st mortgage holder forecloses and bids their amount due. If no one else bids higher, the 1st mortgage holder is the new owner, and subordinate mortgage liens are wiped out. Even if the house is sold for $150,000, the 1st mortgage holder keeps the remaining $ as "Gain on sale of asset". If the 2nd mortgage holder wants to be protected, they must bid $120,001 on the house to take out the 1st mortgage. Then, if they sell the house for $150,000, they at least recoup some of their loan, and seek to get a court judgement for the deficiency.
Tracy
They have similar rights as the first lienholder. The companies usually work together in the case of default.
I think you've probably gotten the answer you were looking for, but I'll add a tiny bit more. In my practical experience:
A mortgage is a document that specifies all the terms of a loan, usually on real property.
A lien is the document that recorded in your county's records that allows for enforcement of the loan terms, or any other encumbrance on your real property. A lien could also be various other types of documents that can be filed to create an encumbrance.
Several states don't use a document called a mortgage now, they use a "trust deed" instead. That said, everyone still calls it a mortgage and the purpose is the same.
Duhaime.com says:
Lien
A property right which remains attached to an object that has been sold, but not totally paid for, until complete payment has been made.
Mortgage
An interest given on a piece of land, in writing, to guarantee the payment of a debt or the execution of some action.
Thanks for that helpful, more complete interpretation.
Sorta.
A mortgage is a contract that gives a creditor certain rights in real property in the event of a default on an underlying Note of the debtor. The Note specifies the amount, and terms, of the loan. Mortgages rarely contain this information. A mortgage is usually recorded with whatever local office keeps track of real estate ownership (clerk, recorder of deeds, etc.) to provide notice to any potential buyer that the property has been pledged to secure a loan. The Note is not usually filed unless there is a default. Essentially, the mortgage is the document that a borrower gives to a lender that says "if I don't pay you, you can take my house." If recorded, it does act as a lien on property -- it is one type of lien.
A "lien" is a legal restriction on property that prevents the owner from giving clear title to the real estate in the event of a sale. It is also recorded with the court/clerk for notice purposes. If you buy property subject to a lien (without first making sure the lien has been satisfied), the lien holder can levy on the property, i.e., get the sheriff to sell the property to satisfy the lien obligation. Typical liens are tax liens, utility liens, mechanics' liens, legal judgments and mortgages.
Mike HennessyPittsburgh, PA
More clarification is good.
Should probably add that "mechanic's lien" is what's being discussed here, mostly (though what it's called may vary by state). It's a lien associated with having done some work or improvement on the property.
The mark of the immature man is that he wants to die nobly for a cause, while the mark of a mature man is that he wants to live humbly for one. --Wilhelm Stekel
"Should probably add that "mechanic's lien" is what's being discussed here"
Without going back through all the posts, the OP asked about a second mortgage -- maybe things morphed over to ML's tho'. A mechanic's lien can also arise by virtue of the provision of goods (like lumber) for the building or improvement of a structure. This is sometimes termed a materialman's lien. The law recognizes that a builder or supplier has a short-term security interest in the property being built/improved until he is paid for his services/goods. If not perfected (by filing a lien document with the clerk) within a fairly short time after work is complete or a final invoice is delivered, the right disappears. Once the lien is filed tho', it's usually pretty solid and can be a real PITA to resolve.
Addendum to my prior post: A second mortgage is the same as a first mortgage -- it does act as a lien on the property once recorded. The difference is that it's only as good as what equity is left after the first mortgage is paid off, since the holder of a senior debt (like a first mortgage) is at the front of the line when cash is being passed out in the event of a default.
Mike HennessyPittsburgh, PA
"If not perfected (by filing a lien document with the clerk) within a fairly short time after work is complete or a final invoice is delivered, the right disappears."I was under the impression that first you served an intend to lien or a demand for payment. That is in general will vary by state.Then if payment is not received you file the lien which is recorded.Then after you file the lien you have to go to court to perfect by showing that infact you are owed the money and the OP has the right to challenge by showing that it was paid, the work wasn't done, etc.Then if you win the nechanics lien is replaced with "plain" (I am sure that there is a legal term for it). And you have a certain period of time, I think 6 months is common but it varies, to perfect it or the mechanics lien expires..
William the Geezer, the sequel to Billy the Kid - Shoe
"I was under the impression that first you served an intend to lien or a demand for payment."
Correct. Indeed, the process to obtain and pursue a mechanic's lien is long and detailed. Any misstep along the way can render it worthless.
Once the notice is given and the lien is filed, the lien is good immediately. It acts as a cloud on the title, making it difficult to sell the property, but the lien holder cannot do anything with the lien alone to pursue payment -- a judgment is needed for that. If the property owner wants a lien removed, he either pays, or requires the lien holder to file a complaint that progresses just like any other contract dispute. The lien stays in place until the case is resolved. If the lien holder wins, the lien becomes a judgment which can be executed upon, as in, send out the Sheriff to sell the place. If the property owner wins, the lien goes away.
Mike HennessyPittsburgh, PA
PS: Nice to see you and the other "exiles" back. ;-)