When you refinance your home loan, you're getting a completely new loan. As a part of the new loan, you'll sign a new loan agreement and you'll also give your new lender rights to your home's title. To do that, you need to remove the old deed of trust from your title and replace it with a new one. All of this gets handled at the closing of your refinance.
Purpose of a Deed of Trust
A deed of trust, sometimes called a trust deed, is a security agreement. When you take out a loan, you sign a promissory note in which you promise to pay back the principal with interest. To back up your promise, you put the actual ownership of your property in the hands of a third party called a trustee. If you pay your loan, the trustee doesn't do anything until it gives you back your title once the loan is paid off. Should you not pay your loan, the trustee will sign the title over to your lender. A deed of trust is the legal document that sets this up, and it's referred to as a security agreement because it gives the lender security that you'll pay your loan.
The Old Loan's Deed
Before you can give your bank a new deed of trust, you need to get your other bank off of your property's record. The money from the new bank gets used to pay your old bank off. Once the old bank gets the money, it issues a document called a reconveyance that takes the title out of the trust set up by the old deed of trust. Once the title is reconveyed back to you, it's yours to pledge to someone else.
The New Deed of Trust
At the closing, the property's owners sign and notarize the deed of trust. While only the borrower signs the promissory note, everyone usually signs the deed of trust, because the lender wants to make sure that no one will stand in its way if it has to foreclose. Once the document is signed, the closer will send it to the appropriate government office to be recorded. The deed of trust then stays in place against the property's title until the loan is paid off.
Refinancing With a Second
When you have a second mortgage on your property, refinancing becomes a little bit tricky. Once you pay off your original first loan through refinancing, the second loan becomes the oldest, or senior, loan against your property. Technically, this makes it a first loan, and makes your new refinance mortgage a second loan. Since most refinance lenders want to be in first position, they will require your other lender to get back in second position through a process called subordination. While most second mortgage or deed of trust lenders will do this, it may take time or carry a fee.
- Quicken Loans: Know Your Mortgage: Subordination
- American Bar Association. "Commercial Real Estate FAQs: What Is the Difference Between a Mortgage and a Deed of Trust?" Accessed July 31, 2020.
- Cornell Law School. "Deed of Trust." Accessed April 6, 2020.
- Consumer Financial Protection Bureau. "Deed of Trust." Accessed July 5, 2020.
- American Bar Association. "Glossary of Real Estate Terms: Deed of Trust." Accessed July 31, 2020.
- Consumer Financial Protection Bureau. "How Does Foreclosure Work?" Accessed July 5, 2020.
- American Bar Association. "Mortgage Note -- Deed of Trust Note." Accessed July 31, 2020.
Steve Lander has been a writer since 1996, with experience in the fields of financial services, real estate and technology. His work has appeared in trade publications such as the "Minnesota Real Estate Journal" and "Minnesota Multi-Housing Association Advocate." Lander holds a Bachelor of Arts in political science from Columbia University.