Legal Mortgage Vs. Equitable Mortgage

Written by erika johansen
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Legal Mortgage Vs. Equitable Mortgage
Courts of equity recognise equitable mortgages. (Real Estate image by Stephen VanHorn from Fotolia.com)

A legal mortgage is one that fulfils all legal requirements for a mortgage, while an equitable mortgage does not fulfil these requirements but still operates as a mortgage. Those with specific mortgage questions should consult an attorney.

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Legal Mortgage

A legal mortgage occurs when the owner gives legal title of property to a creditor to secure payment of the owner's debt. In a typical mortgage, once the debtor pays off the debt, legal title to the property will revert to the original owner.

Equitable Mortgage

Courts of equity evolved to redress injustices caused by legal courts' strict adherence to the law. Courts of equity thus recognise "equitable" mortgages, which occur when a transaction does not fulfil all legal requirements of a mortgage, but still looks and operates like a mortgage; in other words, property is offered to a creditor to secure debt.

Comparison

Equitable mortgages generally operate like legal mortgages, but in case of default, the legal mortgage debt on a property receives satisfaction before that of any equitable mortgage. The equitable mortgage holder's rights to the property also dissolve if a third party that does not know of the equitable mortgage buys the property.

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