Updated: December 10, 2024
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A mortgage note is a legal document you'll encounter when you finalize your home loan. It outlines the terms of your mortgage, including how much you owe, the interest rate and the repayment timeline. Understanding how it works can save you from surprises later — imagine realizing after the fact that your interest rate is adjustable, not fixed.
We'll describe what a mortgage note is and ensure you're prepared to manage this crucial part of your homebuying journey.
A mortgage note is a legal document you sign at closing detailing the loan amount, interest and repayment terms.
A mortgage note secures the loan to the property, while a promissory note is simply a promise to repay the loan.
A mortgage note can be sold to another lender. Still, your loan terms remain unchanged or may be modified through refinancing or loan modification.
A mortgage note is a legal document that outlines the details of your loan agreement when you buy a house. It includes the loan amount, interest rate, repayment schedule and other terms. You’ll sign this document when you close on your mortgage, and it serves as a promise to repay the loan under the specified terms.
The lender holds the mortgage note until you’ve fully repaid the loan. This document gives them the right to take back the property if you default, making it an important safeguard in the lending process.
When comparing a promissory note vs a mortgage note, the difference lies in their purpose, though both are crucial in home financing. A promissory note outlines the borrower's promise to repay the loan, while a mortgage note ties that promise to the property, securing the lender's interest. Below is a detailed comparison of a promissory note vs a mortgage note to help clarify the distinctions:
Comparison Areas | Mortgage Note | Promissory Note |
|---|---|---|
Purpose | Secures the loan to the property, protecting the lender’s rights | A legal promise by the borrower to repay the loan |
Tied to Property | Yes, the property is collateral in case of default | No, it’s simply a repayment agreement |
Document Holder | Lender holds until the loan is fully repaid | Lender holds; borrower receives a copy after signing |
Enforcement | Allows lender to foreclose if the borrower defaults | Requires legal action to enforce, but not tied to property |
Interest Rate | Clearly outlined, including terms (fixed or adjustable) | May or may not specify interest rate depending on terms |
Transferability | Can be sold to another lender or institution | Can be transferred, but not tied to property ownership |
Legal Rights | Grants foreclosure rights to the lender | Does not provide direct rights to collateral |
Financial Terms | Outlines full repayment, interest rates and loan specifics | May include repayment terms but not always property-based |
A mortgage note can take various forms based on the lender and loan type. Here’s a closer look at the types:
Backed by the property itself, this is the most common type of note in traditional mortgages. For example, if you default, the lender can foreclose on the home.
Often used in seller financing, this is a personal loan agreement between individuals. For instance, if you buy a house directly from the owner, they may issue this type of note.
Issued by banks or credit unions for conventional loans. These are standard for homebuyers using traditional financing, such as a 30-year fixed-rate mortgage from a bank.
A mortgage note example includes important details that define your loan agreement. Understanding these elements ensures you know exactly what you're agreeing to:
The total borrowed sum, which determines your overall debt.
This can be fixed or adjustable. If you have an adjustable-rate mortgage, the note may include an introductory rate and, if applicable, the ARM cap information, which limits how high your rate can increase.
This specifies your payment amount and the monthly deadline, helping you stay on track.
The note outlines how often you must make payments (monthly or otherwise), which ensures you know how to budget for the loan.
This section informs you if you can make extra payments or pay off the loan early without penalties, which can save you on interest.
This details the fees you’ll incur if payments are missed or late, ensuring you avoid unnecessary costs.
Specifies the collateral (your home) securing the loan.
Outlines foreclosure risks if payments are not made.
Knowing these items ensures you're prepared for every aspect of your loan, from monthly obligations to potential risks.
Let’s walk through the journey of Aisha, a new homeowner, to see how a mortgage note impacts each step of the homebuying process.
Aisha applies for a mortgage, and the lender checks her income and credit history. After reviewing her finances, the lender approves her for a loan.
Aisha receives her loan offer, which details the interest rate, repayment terms and loan amount. She carefully reviews the terms before accepting the offer.
Once Aisha accepts, the mortgage lender drafts the mortgage note, documenting all key terms, including her monthly payment amount and the consequences of default. This document binds Aisha to the terms of the loan.
Aisha signs the mortgage note at closing. By signing, she agrees to repay the loan according to the terms laid out, which is now legally binding.
After closing, the lender retains the mortgage note while Aisha begins making her payments. The mortgage note may transfer to a new institution if the lender sells her loan.
Aisha makes her mortgage payments as agreed each month. She follows the schedule outlined in the mortgage note, which helps her stay on top of her financial obligations.
Years later, Aisha makes her final mortgage payment. The lender marks the mortgage note as “satisfied,” and the lien on her property is removed, officially making her the full owner.
This process ensures both parties are clear on the loan terms and repayment obligations.
Your lender usually holds the mortgage note until the loan is paid off. However, you can request a copy at any time if needed. For example, if you're refinancing your mortgage or selling your home, having a copy can help verify the loan details. Simply contact your lender or mortgage servicer, who'll typically provide you with a digital or physical copy.
Whether you’re facing financial challenges, looking to pay off your loan early or considering refinancing, knowing what happens to your mortgage note in each scenario ensures you’re prepared. Let’s explore a few common scenarios to understand how your mortgage note changes and what it means for your loan.
When Marcus, a homeowner who lost his job, defaults on his mortgage, the lender can enforce the terms of the mortgage note. Typically, this results in foreclosure, where the lender can seize the home.
The mortgage note gives the lender legal rights to recover the remaining balance through this process. In Marcus’ case, the lender may sell his note or initiate foreclosure proceedings to recover their losses once he defaults.
Samantha, a high-earner, decides to pay off her mortgage early. Depending on the terms in her mortgage note, she may be allowed to prepay without penalty.
If her mortgage note includes a right to prepay, she saves on future interest payments. Once Samantha finishes her payments, her lender marks the mortgage note as “satisfied,” releasing her from further obligations.
When Jose makes his final mortgage payment after 30 years, his promissory note becomes "fulfilled." The lender marks the promissory note as paid, which means Jose no longer owes anything. Once the debt is fully repaid, the mortgage note is also marked as satisfied, and the lender releases any claim on his property.
Emily decides to refinance her mortgage to get a lower interest rate. In this case, her original mortgage note is replaced by a new one with updated terms.
The lender will issue a new note reflecting the loan amount, interest rate and repayment schedule. For Emily, this means her old note is satisfied, and the new terms take over her mortgage.
Here are common questions homeowners have about mortgage notes. Understanding the difference between a mortgage note and a deed of trust and learning how to modify its terms will help you understand your responsibilities and rights as a borrower.
When a mortgage note is sold, the loan terms stay the same, but the new lender or servicer will now handle the payments.
The mortgage note promises to repay the loan, while the deed of trust secures the loan by placing a lien on the property.
Contact your lender for a copy, as they retain the original until the loan is paid off.
Yes, mortgage notes can be transferred or sold to another lender or institution without affecting your loan terms.
You can verify details by reviewing the copy provided at closing or by requesting a copy from your lender.
You’ll need to negotiate with your lender to modify terms, typically through refinancing or a loan modification.
To ensure you understand the terms, review the loan amount, interest rate, repayment schedule and penalties for late payments.
About Zachary Romeo, CBCA
Zachary Romeo is a certified Commercial Banking and Credit Analyst (CBCA), and the Head of Loans and Banking at MoneyGeek. Previously, he led production teams for some of the largest online informational resources in higher education, with over 13 years of experience in editorial production.
Romeo has a bachelor's degree in biological engineering from Cornell University. He geeks out on minimizing personal debt and helping others do the same through people-first content.
