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Mortgages as Encumbrances: Liens and Impacts

An encumbrance is any right or interest in a property that limits its use or transfer. It reduces the value of the property by creating obligations for the property owner. Encumbrances can be voluntary, like taking out a mortgage, or involuntary, like a lien placed due to unpaid taxes. According to data from the American Housing Survey, over 60% of homeowners currently have a mortgage or similar loan encumbering their property.

What Is A Mortgage?

A mortgage is a loan used to finance real estate, where the property serves as collateral for the loan. With a mortgage, the borrower receives cash upfront to purchase a property and agrees to repay the loan over time, usually 10-30 years. 

The mortgage lender is given a lien on the property, which gives them the right to foreclose and take the property if the borrower defaults on the loan. This makes a mortgage an encumbrance on the property. According to the Consumer Financial Protection Bureau, mortgages account for over 70% of all outstanding household debt.

Is A Mortgage Considered An Encumbrance?

Yes, a mortgage is considered a type of encumbrance because it places a lien on the property. This gives the lender certain legal rights over the property until the mortgage is fully paid off.

Some key features of a mortgage as an encumbrance include:

  • It reduces the borrower’s equity in the property. With a mortgage, the borrower has less outright ownership of the home. According to data from the U.S. Census Bureau, homeowners with a mortgage have 34% equity on average, versus 100% for mortgage-free owners.
  • It must be paid off if the borrower sells the home. The lien remains on the property even with a new owner.
  • The lender can foreclose if payments are missed. This can lead to the borrower losing the home. The Urban Institute reports that 1 in every 15 mortgages faced foreclosure proceedings during the 2008 housing crisis. 
  • It appears on title records and must be disclosed to new buyers.
  • It limits the borrower’s ability to further leverage the property. Other loans generally cannot exceed the existing mortgage amount.

How Does A Mortgage Work As An Encumbrance?

A mortgage encumbers a property through the lien process in a purchase transaction:

  1. A homebuyer needs to finance a property purchase but cannot pay the full price upfront. 
  2. The buyer takes out a mortgage loan from a lender for a principal amount that covers the remainder of the purchase price. According to census data, the median down payment for first-time home buyers is only 6%.
  3. At closing, the lender provides the loan cash to the buyer, who uses it to pay the seller. 
  4. In exchange, the buyer signs a promissory note to repay the loan plus interest over time. The average mortgage interest rate is currently around 6%.
  5. The lender files a lien on the property’s title. This gives them rights over the property until the mortgage is satisfied.
  6. The buyer now legally owns the home but their ownership interest is encumbered by the lender’s mortgage lien. 
  7. The buyer makes periodic payments to the lender per the mortgage agreement. This gradually reduces the principal balance. 
  8. Once fully repaid, the lien is removed, unencumbering the property for the owner. The typical mortgage term is 30 years.

What Are The Types Of Encumbrances?

Common types of encumbrances include:

Liens – A lien gives a creditor secured interest in a property as collateral until a debt is satisfied. Some examples:

  • Mortgage liens – Given to lenders to secure a mortgage loan. The most common lien. 
  • Tax liens – Placed by the government for unpaid property taxes. A Tax Policy Center report estimates over $14 billion in property tax liens are issued annually.
  • Mechanic’s liens – Granted to contractors/suppliers to ensure payment for property improvements. 

Easements – Easements give individuals or entities rights to use or access part of a property for a stated purpose. For example:

  • Utility easements allow companies access to maintain infrastructure. According to the U.S. Energy Information Administration, over 50 million residential properties have utility easements. 
  • Public access easements provide a right of way across a property. These are common in landlocked regions.

Leaseholds – A leasehold grants rights to lease and occupy a property for a set period without full ownership. The leasehold is an encumbrance because the lessor retains rights over the property.

Restrictions and Covenants – These encumbrances involve agreements that restrict property usage in some way, like:

  • Homeowners association rules on appearances and maintenance. 
  • Zoning laws on development and usage types.
  • Conservation easements limiting changes to the land. The Land Trust Alliance estimates $2 million acres are protected by conservation easements.

How Can You Remove An Encumbrance From Your Property?

There are a few ways to eliminate encumbrances from a property:

Pay off debt – For liens related to debts, paying off the balance removes the creditor’s rights. Mortgages can be paid off early or refinanced. According to data from Freddie Mac, about 20% of mortgage borrowers refinance each year.

Get consent – Some easements, leases, and covenants can be removed if the involved parties consent. However, some are irrevocable. 

Court order – In certain cases, a judge can order an encumbrance to be removed from a title if the owner contests its validity or necessity. However, this option is rarely pursued due to legal costs.

Wait for expiration – Limited-duration encumbrances like leaseholds end automatically per the set terms of the agreement. 

What Are The Implications Of Having An Encumbrance On Your Property?

Encumbrances can impact property owners in a few key ways:

Reduced equity – Owners have less outright ownership in the property value with encumbrances. This limits the equity available to leverage. 

Usage limitations – Easements, covenants, and laws can restrict how the property can be used or developed. For example, zoning rules prohibit certain business activities in residential areas.

Foreclosure risk – Defaulting on loans secured by liens can enable lenders to foreclose and take ownership of the property. According to data from ATTOM Data, nearly 900,000 homes were foreclosed on during the 2008 housing crisis.

Lower sales price – Encumbrances can make properties less attractive to buyers, reducing sale potential. Complex lien removals can also hinder sales.

Additional fees – Responsibilities like homeowners association dues and special assessments can arise with certain encumbrances. The average monthly HOA fee is $300 nationwide.

How Can You Find Out If There’s An Encumbrance On A Property?

Homebuyers and owners can check for encumbrances through a few methods:

Title search – A title company can search official records to see if any encumbrances are attached to the property’s title. Title searches found over 150,000 liens and easements on residential properties in one 2020 survey.

Mortgage lender – The lender will thoroughly evaluate for any existing liens that could take precedence over their mortgage lien. 

Property inspection – An appraiser or inspector may identify physical signs of easements like utility right-of-ways.

Disclosures – Sellers must legally disclose known encumbrances to potential buyers. However, undiscovered easements may still exist.

Can You Sell A Property With An Encumbrance?

Properties can be sold with encumbrances in place, but there are some caveats:

  • Any mortgages and liens on the property must be fully paid off from the sale proceeds. The buyer does not take on existing mortgage debt. 
  • Easements, leaseholds, and similar encumbrances remain attached to the property for the new owner. 
  • Complex encumbrance removal may delay the closing process. According to data from CoreLogic, resolving title defects adds an average of 16 days to the sale.
  • Buyers may offer a lower price to accommodate encumbrances they must assume. One survey found buyers reduced offers by up to 8% for properties with easements. 
  • Any foreclosure risk from delinquent debts could scare away buyers until resolved.

Overall, minor encumbrances like utility easements will not impede sales much. But major debts secured by liens can deter buyers unless satisfied prior to closing.

What Is The Difference Between A Lien And A Mortgage?

Though both act as property encumbrances, there are some key differences:

Security – Mortgages secure payment of a specific loan. Liens secure any debt obligation. 

Origin – Mortgages are voluntarily taken on by the borrower. Liens can be imposed by courts or governments.

Foreclosure – Mortgage lenders readily foreclose on defaulted loans. Other liens may remove debt first before seizing property.

Interests – Mortgages convey an ownership interest back to the lender if foreclosed. Liens give no ownership, only a right to payment.

Payoff – Mortgages have a set payoff process over decades. Many liens only remain until a particular bill is paid.

Sale impact – Mortgages must be fully paid when a property is sold. Some liens transfer to the new owner. 

According to the Consumer Financial Protection Bureau, the complex foreclosure process makes mortgages much more complicated and impactful encumbrances compared to basic liens.