There exist many financial instruments in the real estate’s finance industry such as mortgages, deeds of trusts, mortgage notes and others. It is important to understand the usage of the terms and to have knowledge of their purpose and application. There are important terms to understand in the deed of trust and mortgage for functional operation and transfer of property. The purpose of this paper is to discuss two common terms; trustee and home equity used in the financial instruments. The paper will give an in-depth explanation on the meaning of the terms, their importance in real estate, the nature of their importance, the involved parties as well as the important issues and concerns to note with the terms. It will also examine the advantages and disadvantages that come with the terms in the real estate industry.
Trustee
The definition and meaning of trustee have often been misunderstood in real estate due to its use and meaning which presents different ideologies. In other fields, a trustee represents the person representing or acting for and involved in the management of a living trust. However, in real estate, a trustee refers to a third party empowered by the deed to display an interest in the home. Normally, there are three parties involved in a deed of trust, the trustee, the lender and the borrower (Sutton, 2013). A trustee is a person who acts on behalf of the lender as an agent by exhibiting an interest in the home and by monitoring the borrower repayments.
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A borrower signs the deed of trust after the assignment of the home loan. A trustee presence is to ensure action is taken in case of default on payment by the borrower by securing the property. Therefore, the trustee holds in trust the home the borrower is purchasing until the borrower settles the loan in full. It is important to understand that the trustee works as an independent third party on behalf of the lender. It is the lender who has a claim to the property if the borrower fails to honor or stops paying the loan before it’s completely settled (Kolbe et al…, 2003).
The duties of a trustee are regulated by the deed of trust, for example the power of sale clause present in many deeds of trust gives the trustee power in case of loan default to foreclose the home and market it in a public auction through the use of the state legal procedures (Sutton, 2013). In a different scenario, when the borrower fully pays the loan, the lender notifies the trustee who transfers the deed over to the borrower. We can, therefore, state that the trustee holds the legal ownership of the borrower’s home in trust until the borrower’s loan is fully paid off.
The term trustee is important to the borrower as it imparts knowledge of the loan repayment and home acquisition process. The borrower gets to understand the duty and requirement of the trustee to act impartially and in good faith as a representative of the lender without manipulation or threats. Bias and discrimination disqualifies him or her as a trustee. The selection process of the trustee varies from a state to another. In some, the trustee is an elected official who serves the interests of the lender and borrowers as a public trustee. In others, the trustee can be anyone as long as there are no blood relations to the borrower or the lead to ensure impartiality (Kolbe et al…, 2003).
Home Equity
Home equity can be referred to as the current market value of the home or an asset from the homeowner’s interest in the home. It can be increased by payments made by the homeowner for the mortgage or increase in property value. It is an important term to understand as it changes with mortgage payment and and the role of the market forces on the value of the property. The purchase of a home through a mortgage invites many players such as a lending institution who have continue to have an interest in the home until the loan is fully paid. The home equity represents the actual portion of ownership by buyer that he or she possesses freely and clearly (Kolbe et al…, 2003).
The buyer attains equity to the home through the down payment at the beginning of the initial agreement of home purchase. It can also be acquired through continued payment of the mortgage. The mortgage payments are contracted portions of money paid to reduce the outstanding balance on the home still owned by the buyer and increases as the property value appreciates thus increasing the value of the equity for the owner. Home equity acts as an asset to the homeowner and though it cannot be converted to cash it can be used for other reasons such as acquirement of a home equity loan or a home equity line of credit (Kolbe et al…, 2003).
A home equity loan is the borrowing against the equity of the home to finance personal goals such as investments, repairs and maintenance of the home. The home loan is advantageous due to its easy nature to acquire and the lower rates of interests compared to other types of credit. The home equity loan is repaid in fixed- rate installments, (Kolbe et al…, 2003) which is beneficial to the homeowner as the loan is presented as a lump sum upon borrowing and is repaid in even monthly installments over the given term of the loan.
On the other hand, home equity also offers access to a home equity line of credit. The difference from the home equity loan is that the HELOC has a variable interest rate (Sutton, 2013). Besides, it also offers flexibility on borrowing and repaying of the loan through a proposition made during the initial draw period that is usually ten years (Sutton, 2013). The homeowner is allowed to borrow money when necessary and is also allowed to make a decision on whether to pay back the money as a minimum interest-only repayment or have a more involved plan of repaying the money more promptly and in a committed manner.
The knowledge of home equity and the ability to borrow against the equity is crucial to the owner. It is also important for the owner to acquire detailed information on equity loans in order to make wise decisions on borrowing. The long-term repayment nature of the loans require the homeowner to be cautious when borrowing to avoid overindulging or taking more than necessary (Sutton, 2013). The best decisions for borrowing against the home equity are made using clear and productive reasons. A home equity loan is assessed to be more suitable for an individual seeking debt consolidation or seeking to finance a big investment. This is because the loan money is availed in a lump sum and the payment is flexible with equal monthly installments and a fixed interest rate (Kolbe et al…, 2003)
On the other hand, the home equity line of credit is suitable and convenient for projects distributed over time that require large sums of money. The HELOC strategy provides a revolving balance that offers flexibility and availability of money for use when needed. The interest is also variable and fluctuates over the outlined period life of the loan. The discussion above shows different terms used in understanding the financial instruments in the real estate finance industry. They are helpful to potential and actual homeowners giving an understanding of the operation of the real estate industry. It has offered detailed information on trustees and home equity that will provide insights on buyers, sellers, real estate agents and lenders in the industry.
References
Kolbe, P. T., Greer, G. E., & Rudner, H. G. (2003). Real estate finance . Chicago: Dearborn Real Estate Education.
Sutton, G. (2013). Loopholes of real estate: Secrets of successful real estate investing. New York: RDA Press.
