What Is a Mortgage Note?

A mortgage note, also known as a promissory note, establishes terms of repayment when a buyer takes out a loan to purchase real estate. Typically, a mortgage note exists between a buyer and a financial institution. However, in some cases, the buyer may choose instead to secure a private loan. A private mortgage note requires buyers to make payments to a private individual or entity directly over the life of the mortgage rather than to a traditional lender.

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

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: A sum of money that a buyer pays in the early stages of purchasing an expensive good or service. The down payment represents a portion of the total purchase price, and the buyer will often take out a loan to finance the remainder.
  • Interest Rate: The amount of interest that will accumulate each month.
  • Borrower: The person borrowing the money.
  • Lender: The person issuing the money, whether it is a private lender or a bank 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 amount owed on the property after the down payment is made and before any interest is applied or monthly payments are made.

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.

When to Seek Assistance

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.