The term 'Equity of Redemption' is included in the Banking edition of the Financial Dictionary. Get your copy on Amazon in Kindle, Paperback or Audio edition. Check for lowest price here...
Equity of redemption refers to a property owner’s legal rights. This term represents the right of a home owner to reclaim his or her property which a mortgage loan secures. Such a right pertains to the period before the bank or lender has foreclosed on the home when the home owner is in default on the mortgage payments that include principle and interest.
As a home owner gets behind on his or her monthly mortgage payments, the lender has the right to accelerate the loan. They will generally not do this until they have attempted to work with the owner to help them get caught up on the mortgage. It is everyone’s best interest for the home owner to remain in the home. Banks often lose money on houses which they sell through foreclosure.
Accelerating the loan means that the bank demands payment in full. It is still possible that the lender may be willing to let the behind home owner catch up on the mortgage payments which are in arrears at this point. Otherwise, if the owner does not meet this demand or make full payment, then foreclosure on the property begins in earnest.
In order to meet this order for full payment, home owners are permitted to find an alternative source of funds to pay off the original mortgage principle, interest, and late fees. If they are able to secure such a funding source, then the equity of redemption gives them the rights to keep the house. The problem for most home owners is that if they are in financial trouble and can not pay their mortgage, then they probably will be unable to secure another loan with which to pay off the first one.
This equity of redemption right only lasts until the home has been foreclosed upon and sold. The equity of redemption is also considered to be a valuable interest in the property and a legal estate in and of itself. This means that the home owner can sell or even transfer away this right to another individual or a company.
Equity of redemption should never be mixed up with the statutory right of redemption. The right of redemption is a separate legal right that is not universal throughout the United States. Some of the states allow for this separate right of redemption which gives home owners significantly greater maneuvering room and legal avenues.
In fact a right of redemption means that for an amount of time determined by state law, the owner is able to redeem his or her house and property simply by paying all principle, interest, costs, and fees. This right is for the period after foreclosure or seizure for unpaid taxes has already occurred. By paying the amounts demanded, the right of redemption means that the owner is able to reclaim his or her home, even if it has already been sold.
How long the statutory right of redemption period lasts depends on the state in question. This amount of time could be for several months. In other states and scenarios, it could stretch on for several years after the foreclosure has been completed. Investors who buy houses in states with this legal right must be aware of the repercussions.
Those who buy seized or foreclosed upon houses could run into a situation where the original owner comes up with the money to pay off the entire original obligation on the house. In this case, the original owner would receive back his or her home. The investor would be left to work out compensation for the lost property with the lender from whom they had purchased it.