Equity of redemption is the financial concept whereby a delinquent mortgagor has the opportunity to prevent foreclosure by coming current on past due payments. By paying back the defaulted debt, the borrower reclaims their equity. To come current on the mortgage, the borrower must pay back the full debt amount, plus interest, and penalties or get on a loan repayment program with the lender. This ensures the borrower will not lose their property and therefore their equity.
Avoiding Foreclosure with the Equity of Redemption
Equity of redemption is a legal right of a borrower to cure the defaulted debt. This default can only be cured by payment or by getting on a repayment plan. Curing a default can also include refinancing the existing mortgage. Of course, however this may be difficult because when a borrower falls behind on their mortgage payment, their credit score decreases thereby making it more difficult to qualify for a refinance. Oftentimes if a borrower refinances their mortgage after falling behind on their payments, it is likely a private loan from a hard money lender or a private investor.
History of Foreclosure
When a lender funds a loan, the lender retains the right to convey interest in the borrower’s property. In return, the borrower is the owner of the property, while the lender has the ability to foreclose on the property if the borrower stops making mortgage payments. After the loan is paid off or the loan is swapped with another loan, the old lender forfeits any interest in the property.
The equity of redemption is a legal concept that was created to allow borrowers the opportunity to avoid foreclosure and maintain the equity they created. In the past many borrowers would lose their property’s simply for missing a few mortgage payments. While lenders have the right to impose their ability to foreclose on a borrower for failing to make payments, the equity of redemption helped many borrowers avoid foreclosure, particularly in a period of the borrower’s life when they experience a financial hardship.
After the Great Depression and other periods in American history where the foreclosure rate increased throughout the country, the congress introduced various measures to protect borrower’s right to their equity. One of the main measurers was bringing out measures that barred lenders from imposing unfair and burdensome clauses within mortgages meant to prevent a borrower from catching up on their mortgage payments or their ability to maintain the terms of the mortgage.
Traditionally, this redemption would terminate when the borrower failed to make mortgage payments. After introducing various measures to protect borrower’s equity, terminating the equity of redemption must be utilized by the court.
