What is a mortgage note?
It’s closing day. Weeks — maybe months — of anticipation have led to this moment. You’re anxious and excited, ready to seal the deal and finally close on your new house. And then your title agent drops a mountain of paperwork in front of you.
A lot of new homeowners blaze through those closing documents, signing wherever needed, but not really absorbing what all of that paperwork actually means. But every single one of those documents is important — otherwise, you wouldn’t need to put your signature on them.
Among those legal documents you’ll want to pay especially close attention to is the mortgage note. Before you file it away with all of your other paperwork, take a moment to read through it so you understand what it means for you as the borrower. Here’s everything you need to know about mortgage notes.
Mortgage notes explained
When you take out a mortgage, you’re entering into a legal contract with your lender, wherein you agree to repay your home loan in installments.
What is a mortgage promissory note?
The mortgage note, also known as the promissory note, is a legal document that confirms you will repay your loan within the established amount of time. It also outlines the terms of your lending agreement with your mortgage provider, including your monthly payment amount, how much interest you’ll pay on the loan and what happens if you’re late on a payment or miss it entirely.
By signing a mortgage note, you’re basically promising to hold up your end of the agreement — paying your mortgage each month in full, sticking to your amortization schedule, etc. — hence the term, promissory note.
How does a mortgage note work?
When you go to the closing table, your title agent will present you with a stack of documents ranging from plat of surveys to closing disclosures. Some of these materials are for you to hold onto for your own recordkeeping, while others you’ll need to sign to get your loan funded and close on your house. The mortgage note fits into the second group. You’ll also receive a copy of the promissory note once you’re funded and the property officially changes hands.
At the time of closing, your lender will hold the promissory note, but that may not be the case for very long. It’s common for mortgage providers to bundle home loans into mortgage-backed securities (MBS) and then sell them on secondary markets where stocks and bonds are traded. Buying mortgage notes is a pretty standard investment strategy, and mortgage lenders use the proceeds from these transactions to fund home loans for more homebuyers.
If this happens with your mortgage — and it almost certainly will — don’t worry. The terms of your mortgage note, including payment amount, nonpayment penalties and repayment schedule, will all stay the same. From your perspective as the borrower, nothing will change even if the note holder does.
When you finally repay your home loan in full, the note will transfer to you. At this point, you’re no longer a borrower, because you don’t own any money on your house.
What’s included in your mortgage note?
Promissory notes contain a lot of pertinent information for borrowers, covering details like the total loan amount you’ll need to repay and maximum fees your lender can charge if you’re late on your monthly mortgage payment. The Department of Housing and Urban Development has a good example of what a standard mortgage promissory note looks like, with each section outlined:
Here’s some of the most pertinent info you’ll find listed on your promissory note:
- Promise to pay: This simply states the borrower’s intention to repay your home loan in full plus accrued interest.
- Interest: This section lists your interest rate on the loan. You’ll notice additional language here briefly describing how your interest rate will change if you have an adjustable rate mortgage.
- Payments: This is a big one. Here you’ll find the amount of your monthly payment, when you’ll need to start making those payments, when your last installment is due (i.e., your maturity date) and where to send your mortgage payments.
- Right to prepay: Want to pay back your loan faster than outlined in your amortization schedule? This section will describe the circumstances in which you can apply extra funds to your loan principal so you can build equity in your home more quickly.
- Loan charges: More of a legal cover than anything, this portion of the mortgage note stipulates that the note holder cannot collect more funds than legally permitted.
- Failure to pay: Don’t overlook this section since it discusses what will happen if you’re ever late paying your mortgage — or, even worse — default on your home loan. This part details when late fees kick in, how much the holder can charge and when an unpaid mortgage will be considered in default.
- Giving of notices: Pretty straightforward, this states how the note holder will send notices to the borrower — usually, that’s through the mail.
- Obligations of persons under this note: With co-borrowers, cosigners and guarantors, homeownership can get pretty complicated. But this portion of the note makes one thing very clear: Anyone who signs the document will need to abide by its terms.
- Waivers: Just about every mortgage note will contain waivers absolving parties of certain commitments. One of the most common ones you might see is a “note of dishonor,” which permits the note holder to inform other parties if you fail to pay your mortgage.
The full document posted on HUD's website is worth a look if you’d like to see how all of this important info is laid out on the page. Keep in mind that HUD’s example is based on an ARM home loan, so the details will be a little bit different compared with your typical 30-year fixed rate mortgage.
Mortgage note vs. mortgage: What’s the difference?
Your mortgage is your home loan — full stop. Your lender agrees to finance your home purchase — minus your down payment — using the property itself as collateral. Meanwhile, the mortgage promissory note is the legal document stating that you agree to repay your home loan. Pretty straightforward, right?
Where people often get tripped up is the fact that your stack of closing documents will contain mortgage paperwork that may initially appear to overlap with the promissory note. But those mortgage documents cover much more ground than the repayment of the loan alone.
If there are two borrowers on the loan, for instance, the mortgage may detail property transfer rights between the co-borrowers. Frequently, a joint tenancy arrangement is used unless otherwise noted. You may also see language prohibiting certain hazardous materials from being stored on the property.
Those are just two examples, mind you, but they provide some insight into the far-reaching scope of mortgage paperwork — especially compared with the relatively narrow focus of a promissory note.
How to get a copy of your mortgage note
You’ll receive a copy of the promissory note when you close on your house, but if you lose that paperwork, there are ways to replace it. For instance, you can contact the note holder to send you a copy. If your lender sold your loan as an MBS, then someone else will hold your note.
You can also reach out to your county’s recorder of deeds to have them reproduce a copy of your note. Or, if you’re feeling especially proactive, you can search through the county’s public records to dig up that document yourself.
A mortgage note is a legal document that you sign when you take out a home loan. By signing it, you promise to repay the lender for the principal of the loan plus interest. Promissory notes also lay out key loan terms like your interest rate, monthly installments and charges you’ll be on the hook for if you’re late on your payments.
Given the implications of this piece of paper, it’s very important that you keep it in a safe place after you’ve closed on a new house or refinanced your mortgage. That goes for all of your closing documents. You never know when you might need to refer to them, so put them somewhere secure that you can get to in a pinch.
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