Mortgage Note
A mortgage note (also called a promissory note) is the legal document in which a borrower promises to repay the mortgage loan under specified terms. It establishes the loan amount, interest rate, payment schedule, and consequences of default. The note is the borrower's personal obligation to repay the debt.
What This Means
What the Mortgage Note Contains
The mortgage note is a binding contract that details every financial term of the loan. Key provisions include:
- Principal amount - The total sum borrowed
- Interest rate - The cost of borrowing, stated as an annual percentage; may be fixed or adjustable
- Payment schedule - Monthly payment amount, due date, and total number of payments
- Maturity date - When the final payment is due and the loan must be fully repaid
- Late payment terms - Grace period and late fee structure
- Prepayment provisions - Whether the borrower can pay off the loan early without penalty
Mortgage Note vs. Mortgage Instrument
The mortgage note and the mortgage (or deed of trust) are separate documents that serve different purposes. The note is a personal promise to repay; it creates the debt obligation. The mortgage instrument secures that debt by pledging the property as collateral. A borrower who signs a note is personally liable for the debt. The mortgage instrument gives the lender recourse against the property if the borrower fails to pay. Both documents are signed at closing but serve distinct legal functions.
Transfer and Servicing
Mortgage notes can be sold or transferred between lenders and investors. When a note is sold, the borrower's loan terms remain unchanged, but the entity collecting payments (the loan servicer) may change. The Real Estate Settlement Procedures Act (RESPA) requires that borrowers receive notice when their loan servicing is transferred. The note itself may be bundled into mortgage-backed securities and sold on the secondary market, which is a core mechanism of the U.S. housing finance system.