What Is a Defeasance Clause?

A defeasance clause is a mortgage provision indicating that the borrower will be given the title to the property once all mortgage payment terms are met.

How Defeasance Clause Works

Defeasance clauses are based on the concept of defeasance, which nullifies a deed or contract. Generally, a defeasance clause is not needed or required in most states.

Overall it can be used to summarize the final procedures in a mortgage loan contract with a real estate property as secured collateral, for example when you purchase a home or a buidling.

Key Takeaways

  • A defeasance clause is a mortgage provision that assumes that the borrower, once mortgage payments are met, will be given the title to the property.
  • Defeasance goes into play when a mortgage is paid off in full.
  • When a borrower reaches the end of their loan, the title ownership is then transferred from the borrower to the lender.
  • Generally, a defeasance clause is not needed since this is the standard procedure for loan expiration, although there are exceptions.

Mortgage Contract Defeasance

Ultimately, defeasance occurs when a borrower completes all of the mortgage payments on their loan and no longer owes any thing to the lender. Secured mortgage loan contracts have detailed procedures for the management of collateral rights throughout the loan and at its defeasance.

Secured Title Rights

A borrower approved for a secured mortgage loan must agree to the mortgage contract terms, which include the assignment of the collateral rights. In a secured mortgage loan, two documents are essential for the lender in securing the collateral. The first document is a property lien, which is used in most mortgage loans.

How a Property Lien Works

The property lien is the document that gives the lender the right to seize the secured collateral. The property lien must be perfected by being recorded with the appropriate state agency.

With a property lien, a lender can quickly receive approval from the courts to notify a borrower of the intention to seize property if a default has occurred.

In a mortgage loan, a lender also maintains ownership of the property throughout the loan through the documentation on the title. When the secured mortgage loan is approved and closed, the ownership of the secured collateral is transferred to the lender, which must be documented and recorded on the title.

When You Pay Off Your Mortgage

Defeasance occurs when the mortgage has been paid, and all of the terms of the loan have been met. When a borrower pays all of their payments and reaches the end of their loan, the title ownership is then transferred to the borrower by the lender.

Generally, a defeasance clause is not needed since this is the standard procedure for loan expiration; however, in some cases, defeasance clauses may detail the final processes for title transfer and loan maturity.

Special Considerations

In some situations, defeasance clauses may also be used for transferring alternative collateral. Specifically, a borrower could include a defeasance clause if they plan to accumulate alternative assets that they would like to replace for the real estate collateral at some point during the loan.

This type of defeasance clause could allow the borrower to obtain title ownership before the expiration of the loan by exchanging alternative collateral for the secured real estate property collateral. Alternative collateral potentially available for use in this situation could include investment securities, money market accounts, or other investment assets.