Promissory Note vs. Mortgage

Buying a home often times requires a mortgage (unless the buyer pays with cash), and when the buyer gets a mortgage, they sign a promissory note. A promissory note is a legal document state the buyer “promises” to pay back the lender.

Promissory notes are a usual part of a real estate transaction. The information they include includes:

  • The amount owed
  •  The terms of repayment (i.e. Principle, interest, etc.)
  •  The terms of the interest rate, fixed or adjustable
  • Possible penalty for failing to repay
  • The maturity date of loan
  • The names of parties involved

These notes are some of the most important parts of buying a home, but are often made light of and misunderstood. It would truly be a mistake for buyers to not read and fully comprehend what the document they signed details.

What’s the difference between promissory note and a mortgage?

 A good number of American’s think the mortgage is the promise to pay back the loan. They are sadly wrong. The promissory note is exactly that, while the mortgage is the contract that takes effect when payments are long overdue.

Another name for the mortgage is a deed of trust. It basically makes you put your property on the table as collateral in case the borrower defaults on the loan.

When people default on the loan, the lender is legally able to seize the property and sell it as a “foreclosure” in attempt to regain money they lost from lending to the original borrower.

Another difference between the two is the lender physically holds the promissory note until the loan amount is paid off. A mortgage is part of the county land records and remains at the local clerk’s office.

What are the similarities between the two?

Sometimes the terms in the promissory note are also in the mortgage, like the amount due, date of the note, and some terms. However, some terms are not included in the mortgage like the interest rate, or the amount paid monthly to the lender.

When the note is paid

Once a loan is paid, the lender gives the borrower the note as a receipt per say. This can serve as protection in the future if there are any discrepancies where they need to prove they’ve paid their debt.  

The most important thing anyone can do with a promissory note is read it and fully understand what they are signing their life over to.

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