No matter your personal or business experience with real estate and home buying, you can benefit from an understanding of the relationship between a promissory note vs mortgage. These legal concepts are essential to the practice of financing a real estate purchase. As a buyer, seller, lender, or borrower, you should carefully review and understand the terms of these legal documents before signing.
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Promissory Note vs Mortgage: What’s the Difference?
The main difference between a promissory note and a mortgage is that a mortgage specifically refers to the secured financing of a home purchase while a promissory note is a more general debt instrument. Mortgage borrowers offer their purchased home as collateral in the event of a foreclosure.
Mortgage vs Note Explained
A mortgage is a loan transaction where prospective homeowners borrow money from a lender to purchase the real estate. A mortgage will likely involve several different documents such as:
- Mortgage loan agreement
- Deed of trust
- Promissory note
- Deeds
- Escrow forms
- Security interest agreement
- Financing statement
In comparison, a promissory note is a legal instrument that also describes a lender-borrower relationship. However, a note serves as a more of an IOU that the lender retains to evidence the borrower’s obligation to repay. While mortgages are specific to home loans, you can use a promissory note in any type of loan or personal loan situation.
What Is a Mortgage?
A traditional mortgage is a method of borrowing money that allows a home buyer to purchase a home without the worry about having the total amount for the house in cash. In a mortgage, the lender provides the borrower with a lump sum for the house purchase minus whatever the home buyer provides as a down payment.
The terms of the loan generally allow the borrower to make repayment installments known as mortgage payments until the loan reaches its maturity date (usually 15 or 30 years). The mortgage payments are usually a monthly payment of combined principal and interest.
Mortgages are a form of secured debt where the lender takes an interest in the purchased home as collateral in case of a borrower default. A default is when the homeowner is unable to make timely repayment on the loan. When default occurs, the lender has the opportunity to start a foreclosure on the home as a way to offset the borrower’s outstanding debt.
What is a mortgage promissory note?
A mortgage promissory note, also known as a mortgage note, is a promissory note used in a mortgage deal. In a real estate loan transaction, the promissory note in Florida is a legal document that the lender holds to evidence their right to repayment from the borrower.
A mortgage promissory note will usually convey the following information about the borrower’s promise to repay:
- The name of the borrower and lender (i.e., holder of the note)
- The amount of money the note is worth
- The applicable interest rate
- The loan’s maturity date
How do a mortgage and note relate to each other?
When it comes to how these legal documents relate to each other, you can think of a promissory note as one piece of a mortgage loan transaction. The promissory note is what the lender holds to enforce their legal right to repayment in the event of a default and foreclosure. Additionally, many lenders will sell their interest in a promissory note to other parties as an investment. The lender can transfer the note to a new holder through a purchase agreement and subsequent assignment of rights.
Do you need a promissory note for mortgage Loans?
A promissory note is not essential for a mortgage loan. The terms of the loan can be effectively written through other legal documents standard to a loan. Whether your mortgage lender uses a promissory note will depend on their preferred forms. However, as mentioned above, lenders often prefer to use a mortgage and promissory note combination because of the ease in which they can separately sell and transfer their rights under the note to another party.
Why a Promissory Note for Mortgage Is Important
A mortgage and note combination for a loan transaction is still important for a mortgage because it allows the holder to enforce the obligations against the borrower without needing the information in the loan agreement or other legal documents.
A Note on Deeds, Deed of Trust, and Titles
As you navigate the mortgage or mortgage refinance process, you may come across other documents in addition to the loan agreement and promissory note. Three important documents to understand are the deed, deed of trust, and title.
Deed and Title to Real Estate
A deed is a legal document that conveys an interest (i.e., title) of real property from one person or entity to another. The title simply refers to the party that enjoys the full rights and responsibilities of the real estate (e.g., right to profit, habitation, use, and enjoyment, etc.).
Different types of deeds generally come with varying levels of warranty to the buyer, grantee, or other recipients of the transfer about the grantor’s ability to convey title. In most cases, you will record the deed with the county or other local government body that has jurisdiction where the property is located.
Deed of Trust
Similar to a promissory note, a deed of trust is a legal instrument that lenders use to record their security interest in a piece of real estate. However, a deed of trust is used exclusively in the context of a real estate transaction, unlike a promissory note which is a more versatile lending tool.
The deed of trust will contain relevant information about the parties, the transaction giving rise to the security interest, and other rights and obligations of the lender and borrower with respect to the property. Like a deed, you generally record the deed of trust to provide public notice of the lender’s security interest in the property.
Need Help with Mortgage and Promissory Note Law?
The attorneys at Cueto Law Group are available to assist individuals and businesses when it comes to real estate and other lending matters involving a mortgage or promissory note. We provide counsel on the legal terms of mortgage note documents so our clients can make informed business and personal finance decisions. If you have questions about enforcing or voiding a loan agreement or not, our litigation attorneys are experienced in related civil actions.
Contact Cueto Law Group today for a consultation related to a mortgage or a promissory note.
Mortgage vs Promissory Note: Our Final Points
A mortgage and promissory note are often two tools that lenders use in combination to document the terms of a loan transaction to finance a real estate purchase. As a lender, it’s important to understand your rights under the loan agreement and your available recourse in event of a borrower default.
Conversely, borrowers should carefully review the terms of their mortgage and related promissory note to understand their repayment obligations moving forward and how those terms align with personal finances.
FAQs
Below are some brief answers to other common questions you may have about mortgages vs promissory notes.
Is a Mortgage a Promissory Note?
A mortgage is not a promissory note. Although, a lender’s rights under a mortgage may be held through a promissory note, which documents the borrower’s repayment obligations (e.g., interest rate, loan amount, maturity date, etc.). A mortgage, in contrast, is a lending agreement specifically used to purchase real estate.
What Happens if I Signed the Mortgage but Not the Note?
Realistically speaking, not much will happen if you signed the mortgage but not the note. However, the lender may have a difficult time enforcing the terms of the unsigned note without the underlying mortgage agreement it’s associated with. However, you will likely still have the same repayment requirements.
Who Holds the Promissory Note?
The lender to the mortgage or other loan transaction will be the party who keeps the original promissory note. The note is simply a legal instrument that the holder can use to enforce their right to repayment or to foreclose on collateral from the borrower through civil court.
Additionally, the lender keeps the note in the event they were to sell, transfer, or otherwise assign their interests in it.
What if My Lender Cannot Produce the Note?
If your lender cannot produce the promissory note, then they may have trouble enforcing its terms or may not be able to transfer their rights in the note to another party. Florida generally requires lending agreements (especially those for real property) to be in writing.
The outcome may depend on whether the lender or borrower has other loan agreements and legal documents that reflect the terms of the transaction.
What Is an Affidavit of Lost Note?
An affidavit of lost note is a legal document that a lender can submit to the court to protect their interests after losing a promissory note. The affidavit will state information about the lost note such as its name, date signed, remaining balance, and other original terms.
You may also attach other evidence with the lost note affidavit to show proof of the original note’s existence.
