With all of the mortgage terms you have to understand when buying a new home, it can feel like you’re learning a new language. Preapprovals, appraisals and the fact that “concessions” don’t involve hot dogs at a baseball game can be more than a little bewildering for first-time home buyers.
If you’re in the market for a mortgage, the more you know, the more confident you’ll be with each transaction during the life of the loan. If you find yourself scratching your head over mortgage lingo, we’d like to make your contract a little clearer by explaining one key concept: the mortgage promissory note.
Understanding A Mortgage Note
Essentially, a mortgage promissory note is an agreement that promises that the money borrowed from a lender will be paid back by the borrower. The mortgage note also explains how the loan is to be repaid, including details about the monthly payment amount and length of time for repayment.
Although the home loan process involves both a mortgage and a mortgage promissory note, the note can be used singularly in a lending relationship between two individuals. In this case, a note is simply a promise to pay back the amount of money that is borrowed in a set amount of time.
“Another way to think of it is that the promissory note is the IOU for the home loan,” says David Reiss, a law professor at Brooklyn Law School in New York and real estate expert.
Mortgages And Mortgage Notes: A Deeper Look
Although the mortgage note provides the financial details of the loan’s repayment, such as the interest rate and method of payment, the mortgage itself specifies the procedure that will be followed if the borrower doesn’t repay the loan. For example, the mortgage loan explains that the lender can demand complete repayment if the loan goes into default or that the property can be sold if the buyer fails to repay the loan.
In the case of a home loan, the mortgage note is a private contract between the client and the lender, and the mortgage is filed in the regional government records office. Once you’ve paid off the loan, the lender will then record a document releasing the borrower from the liability of the mortgage or deed of trust and the promissory note.
It’s A Package Deal
In the home loan process, a mortgage and a mortgage promissory note are not a question of one or the other. Rather, both play distinct roles in the relationship between the lender and borrower.
“A home loan refers to a transaction where a borrower borrows money from the lender and, in turn, signs a promissory note that reflects the indebtedness as well as a mortgage that gives a security interest in the home in case the debt is not paid back,” explains Reiss.
However, a few specific situations do exist in which one might use a mortgage note in real estate without the accompanying mortgage part of the home loan. For example, in farming communities, it’s not uncommon for a family member to sell a piece of property to another family member just using a promissory note.
Buying And Selling Mortgage Notes
It’s important to be aware of the fact that the holder of your mortgage promissory note, typically the mortgage lender, can sell your mortgage note without first asking for your consent For mortgage and real estate investors, purchasing promissory notes through brokerages or as part of larger mortgage bundles can sometimes present a profitable opportunity.
Although the details of your mortgage established in your mortgage note won’t change if the note is sold, the recipient of your monthly mortgage payments likely will. If this ends up being the case, it can be wise to double-check the status of your promissory note to ensure that it isn’t a case of fraud and that the ownership of the note has actually changed.
How To Obtain A Copy Of Your Mortgage Note
When you close on a property, you’ll receive a copy of your mortgage promissory note with the rest of your closing documents. If anything should happen to your copy – whether you misplace it or somehow it gets destroyed – you can request a new copy of the note from your lender, the registry of deeds, the county recorder’s office or your mortgage broker (if you worked with one). Again, if your mortgage note gets sold, the terms of the note will not change, but you should receive an updated copy of the note from the new owner.
Get Started Shopping For A Mortgage
Mortgage promissory notes are important real estate documents that contain valuable information about a borrower’s obligations to their lender. For homeowners who want the most accurate sense of what the terms of their mortgage loan are, becoming familiar with the features of your mortgage note can be extremely useful and help you make more informed financial decisions for your future.
Are you ready to start shopping for a mortgage? Review the steps in our guide, "How Do I Shop For A Mortgage,” to make sure you’re heading in the right direction! Still have questions? Talk to a Home Loan Expert to get your questions answered and start on your home loan today.