In finance, a security instrument is the formal agreement that protects a lender’s investment by using property or assets as collateral. When you borrow money, especially for a home or business, lenders require this document to ensure repayment. If you fail to repay the loan, the security instrument gives the lender legal rights to foreclose or repossess the collateral.
Common Types of Security Instruments
Mortgage: A two-party agreement between borrower (mortgagor) and lender (mortgagee). The borrower holds legal and equitable title to the property, while the lender holds a lien. Foreclosure requires judicial proceedings, which can be lengthy and costly. Mortgages are prevalent in states like Florida, New York, and Illinois. Learn more about mortgages in our Mortgage Note article.
Deed of Trust: Involves three parties—the borrower (trustor), lender (beneficiary), and a neutral trustee. The trustee holds bare legal title until the loan is paid off. If the borrower defaults, the lender can initiate a faster, non-judicial foreclosure by instructing the trustee to sell the property. This is common in states such as California, Texas, and Virginia. Explore more details in our Deed of Trust glossary.
UCC-1 Financing Statement: Used mainly for business loans against personal property like equipment, inventory, or accounts receivable. Filing a UCC-1 financing statement with the Secretary of State publicizes the lender’s claim, protecting its priority over other creditors. This is essential for businesses securing loans through personal property rather than real estate.
Comparing Mortgage and Deed of Trust
| Feature | Mortgage | Deed of Trust |
|---|---|---|
| Parties Involved | Borrower & Lender | Borrower, Lender & Trustee |
| Title Held By | Borrower holds legal & equitable title | Trustee holds bare legal title |
| Foreclosure Process | Judicial (through courts) | Non-Judicial (no court required) |
| Common States | Florida, New York, Pennsylvania, Illinois | California, Texas, Virginia, Colorado |
Important Considerations
- State Laws Determine the Instrument: The choice between a mortgage and deed of trust depends on the state’s legal system and local practices.
- Read Before Signing: These documents outline your rights and lender’s remedies upon default.
- Business Loans: A UCC-1 filing can cover all business assets; negotiate to limit collateral to specific items to protect other assets.
Frequently Asked Questions
Is a promissory note a security instrument?
No. A promissory note is your promise to repay the loan, while the security instrument pledges collateral to secure that promise. Both are signed together in most loan agreements. See our Master Promissory Note for details.
What happens when I pay off my loan?
For mortgages, lenders file a satisfaction of mortgage, and for deeds of trust, a trustee issues a deed of reconveyance, which releases the lien and returns full legal title to you.
Can I choose between a mortgage or deed of trust?
Typically no. This is determined by state law and common lending practices in your area.
For authoritative guidance on foreclosure laws and loan payoff procedures, visit ConsumerFinance.gov on foreclosure and review IRS resources on secured loans.
