What’s The Difference Between a Mortgage & a Promissory Note?
If you are planning to purchase a property, it’s important that you understand the difference between a mortgage and a promissory note before engaging in a real estate transaction. You will be required to sign both of these documents when you take out a loan to purchase the property.
A promissory note is exactly what it sounds like – it’s the promise to pay back the loan. It’s essentially an IOU containing the promise to repay the amount borrowed, along with the terms for repayment. The promissory note is a contractual agreement between the borrower and the lender and includes the name of the borrower, property address, interest rate and whether it’s fixed or adjusted, late charge amount, amount of the loan, and loan terms. Promissory notes are not recorded in county land records, while mortgages and deeds of trust are. The note is held by the lender while the loan is outstanding, and then recorded as paid and returned to the borrower once it’s completely paid off.
A mortgage note is a type of promissory note that is secured by a mortgage loan. Should you wish to seller finance your home, you can create a mortgage note, which outlines the amount due on the loan, interest rates and the repayment cycle. In this case, you are the lender and collect payments from the borrower. You can also choose to create a mortgage note and sell it to a note buying firm that will buy mortgage notes.
A mortgage or deed of trust provides security for the loan held by the promissory note. Mortgages and deeds of trust contain the agreements between the borrower and lender, as well as an acceleration clause allowing the lender to demand the full repayment of the loan should the borrower default on the loan. In the event that the borrower does not pay back the debt required on the promissory note, the property can be sold to repay the debt. In most cases, the lender has to notify the borrower before accelerating the loan. The mortgage or deed of trust will also contain the name of the borrower, property address and legal description of the property.