Hypothecation: Title Theory vs Lien Theory

If you are considering taking out an hypothecation mortgage, then you have two options to choose from. You can pick the Lien theory, or the Title theory. Both of these different theories have advantages, even down to the fact that most States in the US only recognize the Lien theory mortgage (although there are some that only work with the Title theory).

The Lien Theory

The lien theory is the most commonly used hypothecation theory, and is recognized by most states. In this type of mortgage, the borrower raises money on the security of the property. The mortgagor does not take the deed of the house, and only in cases of extreme defaulting on the mortgage will the lender be able to take hold of the deed. Although the mortgage is securing the property, and liens taken out on the house prior to the mortgage will be considered to have priority over the mortgage lien.

The Title Theory

This is a much more risky strategy, where the borrower hands over the title of the property to a third party. This secures the property for the lender, making the mortgage interest rates lower. This is beneficial to the borrower if they only need the money for a short time.

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