What is a Defeasance Clause?

A defeasance clause is a statement in a mortgage contract indicating that once the borrower has met all the obligations for the loan, the lender is required to surrender the title. Defeasance clauses are used in regions where mortgages are not offered on a lien basis. When a lien is used, the lender retains an interest in the property and the right to foreclose in the event the borrower does not meet the terms of the loan. If a loan includes a defeasance clause, it should be read carefully to confirm the lender's interest in the property will be terminated when the loan is paid in full, along with all interest and other fees.

When a mortgage is established with a defeasance clause, the lender holds what is known as a defeasible title. Defeasible titles are conditional titles that can be revoked in certain circumstances; the defeasance clause in the mortgage paperwork indicates the lender will lose title to the property when the borrower has paid off the loan. The clause can also provide information about prepayment penalties, if the loan is structured with such penalties.

Once the borrower has paid off the loan in full, the title can be redeemed, and the former borrower will become the titled homeowner. With full title to the property, people can choose to sell it, refinance it, use it for a line of credit, or simply retain ownership and use the property to live in or to generate income. The title should be cleared once the lender's interest is terminated, unless it was clouded by other issues unrelated to the mortgage loan used to purchase it.

The mortgage paperwork typically includes detailed terms and conditions. People can read the papers to get information about the estimated repayment date, the amount that will be paid over the life of the loan, and other matters. This information should be reviewed carefully. If anything seems out of the ordinary or does not meet the borrower's expectations, it should be discussed before the mortgage paperwork is signed.

In a mortgage with a defeasance clause, once the loan is repaid in full, the lender may act to release the title immediately to the borrower, or the borrower may have to file additional paperwork. It is important to remember to clear the title at the end of a mortgage loan, because if there are problems with the title, they can become an issue at a date in the future.