What Is a Mortgage Note?

A mortgage note, also known as a promissory note, outlines the terms of repayment for a real estate loan. It includes the loan amount, interest rate, repayment schedule, and penalties for default. While typically issued by financial institutions, buyers can also secure private mortgage notes, where payments are made directly to an individual or private entity instead of a traditional lender. The mortgage note serves as a legally binding agreement and establishes the property as collateral for the loan.

What does a mortgage note do?

A mortgage note clearly outlines the terms of a loan as they relate to purchasing property. It specifies the amount borrowed, the person or people who borrowed the money, and the lender.

As a legally binding contract between a borrower and a lender, a mortgage note helps to ensure a clear arrangement is in place for the life of the mortgage.

Different Types of Mortgage Notes

Mortgage notes can fall into one of several categories.

Secured Mortgage Notes

A secured mortgage note is backed by collateral —usually the property itself. Borrowers often find it easier to get a secure mortgage note, which carries lower interest rates and better terms than an unsecured loan.

Private Mortgage Notes

Private mortgage notes are secured by a private lender, such as a private individual, rather than by an institution. In some cases, buyers may get better terms by working with a private lender since private lenders can often set their own terms for mortgage loans.

Conventional or Institutional Mortgage Notes

Institutional mortgage notes are issued and backed by a financial institution, such a bank, rather than a private lender. They will often have specific terms and require that borrowers meet certain criteria.

Parts of a Mortgage Note

A mortgage note specifies several components of the loan:

Down Payment: An upfront payment made by the buyer during the initial stages of purchasing a high-value asset, such as real estate. This payment reduces the total loan amount needed, with the remaining balance often financed through a loan secured by a mortgage note.
Interest Rate: The amount of interest that will accumulate each month.
Borrower: The individual or entity responsible for repaying the loan. The borrower’s financial commitment is documented in the mortgage note, which outlines repayment expectations.
Lender: The party providing the loan funds. This could be a private lender offering a private mortgage note or a financial institution acting as the creditor.
Terms of the Mortgage: A mortgage note will have specific terms, including details regarding monthly payments and the consequences of the borrower failing to meet their obligations. The terms will also set forth the amount of time the buyer has to repay the loan.
Penalties: Any specific fines or fees issued if the borrower does not meet the obligations established by the mortgage note.
Initial Principal Balance: The original loan amount owed after deducting the down payment, before any interest accrues or payments are made. This balance is a critical figure recorded in the mortgage note, as it establishes the foundation for calculating monthly payments, interest charges, and the overall repayment schedule outlined in the terms of the agreement.

Mortgage Note vs. Mortgage

A mortgage note, or promissory note, is a document that represents the borrower’s promise to repay the amount of money they have borrowed. Mortgage notes contain the information stated above but are not recorded with the county. They are essentially IOUs between the lender and the borrower.

The mortgage —also referred to as the deed of trust—is a separate document that serves to secure the loan. This document is recorded with the county and contains an acceleration clause, which allows a lender to demand loan repayment in full if the borrower has defaulted on the loan. Defaulting on a loan can occur when a borrower violates any of the contract terms, but typically involves failure to make regular payments. It is the mortgage (deed of trust) that allows the lender to foreclose on the property to satisfy the debt.

You Might Have to Take Legal Action if the Buyer Defaults

In order to collect after a buyer fails to adhere to the terms of the loan agreement, the purchaser of a mortgage note may have no choice but to take legal action. It can prove difficult to move through the legal process and may cost more than many mortgage lenders anticipate.

Up Next: Learn How To Create a Mortgage Note

Interested in Buying or Selling a Mortgage Note?

If you’re interested in buying or selling a mortgage note, have questions about how to invest more effectively, or want to learn more about your options, contact Deed Street today.

What Happens to a Mortgage Note When a Loan Defaults?

When a loan defaults, the terms of the mortgage note dictate the lender’s next steps. Typically, the lender may initiate a collection process, modify the loan terms, or begin foreclosure proceedings to recover the owed balance. The default impacts the borrower’s credit and can lead to the sale of the property if the issue isn’t resolved. Lenders aim to recoup their investment, either through repayment agreements or by selling the property tied to the mortgage.

Why Do Consumers Opt for Private Mortgages?

Private mortgages appeal to a variety of borrowers because they offer flexibility and opportunities that traditional lenders may not. For instance, individuals with credit challenges, self-employed borrowers with non-traditional income, or buyers of fixer-upper properties often find private mortgages more accommodating. Families may also choose private mortgages to keep financial arrangements within the family and avoid paying interest to banks, making it a practical option for preserving wealth.