Promissory Note

Note vs Mortgage

The promissory note and the mortgage (or deed of trust, depending on the state) are two separate legal documents that work together. The promissory note establishes the debt obligation: who owes what amount, at what interest rate, on what schedule, and what happens if they fail to pay. The mortgage or deed of trust pledges the property as collateral for that debt. A borrower who signs a note is personally liable for repayment. The mortgage gives the lender the right to foreclose on the property if the note terms are not met. Both documents are signed at closing.

Key Terms in the Note

The promissory note specifies the original loan amount, the interest rate (fixed or adjustable, with adjustment terms if applicable), the monthly payment amount, the first and last payment dates, the mailing address for payments, late payment terms (typically a grace period and a flat fee or percentage), and any prepayment penalty provisions. For adjustable-rate mortgages, the note includes the index, margin, adjustment frequency, rate caps, and payment caps.

Who Holds the Note

The original lender may hold the note or sell it on the secondary market to investors through entities like Fannie Mae or Freddie Mac. When a loan is sold, the note is transferred to the new owner or their custodian. The loan servicer (the company that collects payments and manages the escrow account) may be a different entity from the note holder. Borrowers have the right under RESPA to request information about who holds their note.

Note and Loan Servicing Transfer

When a mortgage loan is sold or the servicing rights are transferred, the borrower must receive written notice at least 15 days before the effective date. The terms of the promissory note do not change when the loan is sold or the servicer changes. The interest rate, payment amount, and all other terms remain exactly as stated in the original note. A new servicer cannot modify the note terms without the borrower's agreement.