The trust deed is the modern day version of the mortgage. It is a legal document that gives your mortgage lender the right to foreclose and sell your property if you fall behind on your mortgage payments.
Technically, a mortgage consists of two documents: a promissory note and the trust deed. The promissory note lists the details of your mortgage loan, including the principal amount, interest rate and repayment terms. The trust deed gives the lender the right to foreclose on your home if you don't honor the terms of the promissory note.
Most states require your lender to record a copy of the trust deed with the County Recorder's office in the county where your property is located. This just means the lender takes a copy of the trust deed to the County Recorder and the County Recorder keeps a copy for public records. Recording is required so that future lenders will know whether your home is already secured by another mortgage, or trust deed.
A first trust deed is a mortgage that has priority over all other mortgages or trust deeds. This simply means that the first trust deed was recorded before any other liens, encumbrances or trust deeds involving your property. Priority is important because if a lender forecloses on a first trust deed, then all other trust deeds disappear, and the lender takes your home free and clear. But, if the lender holding a second trust deed forecloses, the lender takes your home subject to the first trust deed.
A first trust deed has priority over a second mortgage or a home equity loan or a line of credit given to you after you sign the first trust deed. This means that the lender for the second mortgage is in a less secure position, because that lender is always subject to the first trust deed. This makes obtaining a second mortgage or home equity loan more difficult and risky, which means you will probably have to pay a higher interest rate on the loan.
You own a home worth $400,000. You borrowed $325,000 to buy the home, and your lender recorded a first trust deed at that time. For a year, you make interest-only payments, so that after one year, you still owe $325,000. At that time, you borrow $50,000, and the lender records a second trust deed to secure that $50,000 loan. You now owe a total of $375,000 on your home. If the market crashes, and your home is suddenly worth only $325,000, then your second mortgage lender has no security, because all $325,000 of value in your home will be used to pay off the first mortgage lender (assuming you default on your mortgage and the lender forecloses).
- Nolo's Encyclopedia of Everyday Law; Shae Irving, J.D., and Nolo Editors; 2008