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Univ. of Kentucky College of Law

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Wednesday, February 5, 2014

What Happens to the Original Loan When You Refinance?

A quick Q&A with Benny Kass of the Chicago Tribune:

Q: I refinanced a two-year adjustable-rate mortgage into a 30-year fixed loan. Does that equal a new note or does the original note of the prior mortgage continue on to the new bank or servicer?

A: When you obtain a mortgage loan, there are two important legal documents you will sign: a promissory note (IOU the money) and a deed of trust (some states still use mortgages). The mortgage document is recorded among the land records in the jurisdiction where your property is located. Why? This puts the world on notice that there is a lien (a cloud) on your title, so that the lender's interest is secured.

When you sell that property, the loan is paid off and the lien is released by recording a formal document on land records. The promissory note should be returned to you, marked "paid and canceled."

Basically, when you refinanced, it's the same as a new loan. The original adjustable-rate mortgage will be released from land records, the new mortgage document will be recorded and you will sign a new promissory note.

Bottom line: When you pay off a mortgage loan with a refinance, make sure it is released from land records. Most commercial lenders will file it themselves on the appropriate land records. But some lenders do not release but send you the note marked paid and canceled and put the burden of preparing and filing the release on you. Often, the clerks at the recorder of deeds office can be helpful.

And, if your seller took back financing — or you obtained a mortgage loan from a private party — you must make sure you get the note back and arrange for a release. My suggestion: have the release prepared, and you should personally give the final payment to your lender and at the same time have him/her sign the release, get it notarized and get back a copy of the note marked "paid and canceled."

In situations where you cannot personally deal with the lender, have the final payment sent to your attorney with instructions that it will be released to the lender only when the release and the note have been returned.

http://lawprofessors.typepad.com/property/2014/02/what-happens-to-the-original-loan-when-you-refinance.html

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