What is a "deed of trust" in mortgage agreements?

A deed of trust serves as a legal document that secures a loan by creating a lien on the property, thereby providing lenders with a form of security interest in the property being financed. This lien ensures that if the borrower defaults on the loan, the lender has the right to foreclose on the property to recover the unpaid loan amount.

This mechanism functions similarly to a traditional mortgage, but the key distinction is that a deed of trust typically involves three parties: the borrower, the lender, and a third party known as the trustee. The trustee holds the legal title to the property on behalf of the lender until the loan is paid off, at which point the title is returned to the borrower. This setup can facilitate a more streamlined foreclosure process if necessary, compared to dealing with a mortgage alone.

The other options do not accurately describe a deed of trust. For instance, it does not involve transferring ownership of the property to the bank, nor is it simply a clause for early loan repayment without penalties or an insurance policy requirement. Each of those elements pertains to different aspects of mortgage financing but does not align with the function of a deed of trust.