When you close on a home, one of the most important documents you’ll review and sign is your mortgage note. It’s an agreement between you and the lender that outlines the terms and conditions of the mortgage. The document tells you how much and when to pay, and spells out the consequences if you don’t. Understanding the mortgage note and how it works is an important part of the mortgage process.
Table of Contents
Key Points
• A mortgage note is a legally binding agreement signed at closing that outlines the terms of the mortgage loan.
• It is often referred to as a promissory note and serves as the borrower’s promise to repay the debt to the lender.
• Key components of a mortgage note include the promise to pay, interest rate, payment details, borrower’s right to prepay, and definitions of default.
• The mortgage note is typically held by an investor who buys it on the secondary market (e.g., Fannie Mae or Freddie Mac), though a loan servicer handles the day-to-day management and payment collection.
• The terms of the original mortgage note, such as the payment amount and interest rate, do not change even if the loan is sold to a new holder.
What Is a Mortgage Note?
A mortgage note is what you sign when you agree to take on the responsibility of a mortgage. It’s one of the key documents you’ll sign at closing. The note outlines:
• Your interest rate
• The amount you owe
• When the payments are due
• The amount of time it will take to repay the loan
• How to remit payment
• Consequences for missed payments
These notes may be used in owner-financed home sales as well as in lender-financed ones. The buyer and seller sign the document, which contains the loan terms. When a borrower pays the seller directly, the note gives the lender the ability to enforce its rights through a mortgage lien, mortgage foreclosure, or eviction.
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What Is Included in a Mortgage Note?
The mortgage note outlines the conditions and responsibilities of the buyer. You’ll see sections like these in a mortgage note:
• Borrower’s promise to pay. This section includes the total amount of money you’re borrowing and the name of the lender to whom you will remit payment.
• Interest. The interest rate charged on the unpaid principal is listed here.
• Payments. Borrowers agree to pay a monthly amount before or on a specific date. The place where borrowers can remit payment is also listed.
• Loan charges. All charges by the lender must be legal. Any amounts over the legal limit will be refunded to the buyer or applied to the principal.
• Borrower’s failure to pay as required. Default is clearly defined for the buyer, as are late charges and what happens in the event of default.
• Giving of notices. Borrower and lender will have the details of how to contact each other for legal purposes.
• Obligations of persons under this note. All people listed on the mortgage note are equally responsible for repayment of the loan.
• Uniform secured note. Buyers are advised that a security instrument is signed in addition to the note that protects the note holder from potential losses by giving them the ability to foreclose in case of default.
Mortgage Note vs. Promissory Note
A mortgage note is often referred to as a promissory note. Promissory notes aren’t confined to home loans. They can be used in any situation where one party agrees to pay another party a sum of money. You might have previously had one for a student loan or personal loan, for example.
Is a Mortgage Note a Legal Document?
A mortgage note is drawn up by the lender when preparing your mortgage for closing during underwriting, which is a key part of the mortgage loan process. This document is what makes the terms and conditions of the mortgage legally binding, so technically the mortgage note is a legal document.
What Does a Mortgage Note Look Like and How Does It Work?
The description of mortgage notes isn’t particularly unique, no matter how important this document is. On the surface, a mortgage note looks like all the other many pieces of paper or electronic documents you’ll sign as part of the closing process. Fortunately, the terms and conditions of the mortgage note that you’ll sign will be outlined in a mortgage closing disclosure provided at least three business days before the closing date. The closing disclosure document can be compared with the loan estimate that was provided at the beginning of the mortgage application process. (Visit an online help center for mortgages if you want to understand the entire mortgage process.)
Where Do You Sign a Mortgage Note?
You will sign the mortgage note at the closing. It will often be accompanied by another document, called the mortgage, security instrument, or deed of trust. It restates the terms of the mortgage note and outlines the rights and responsibilities you have as a borrower. As a security instrument, the document specifically gives the lender the right to foreclose on your property if you fail to make payments. Having this right reduces the risk to the lender, which can offer more competitive terms to the borrower in return.
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Who Holds the Mortgage Note?
A mortgage note isn’t usually held by the lending institution that originated your loan. Mortgage notes are often sold, and it’s not always easy to tell who holds your mortgage note. This is because the loan servicer (the company that sends your mortgage statements and handles day-to-day management of the loan) is usually different from the note holder.
Selling a Mortgage Note
You’ll see in your closing documents a provision that allows the lender to sell the mortgage note. This is common and legal in home contracts, and typically occurs soon after the property closes. Lenders sell mortgages on the secondary mortgage market, usually to one of the large federally backed mortgage companies, Fannie Mae or Freddie Mac.
What Happens When a Mortgage Note Is Sold?
When a mortgage is sold, the lender doesn’t have to keep the mortgage on its balance sheet, which, in turn, allows it to originate more mortgages for other borrowers. Fannie Mae and Freddie Mac then bundle mortgages into what is called a mortgage-backed security. Investors around the world (think pension funds, mutual funds, insurance companies, and banks) can buy shares of mortgage-backed securities. The investors will receive steady returns as the mortgages are repaid by individual borrowers.
When your mortgage note is sold, the terms of your mortgage won’t change. Your payment, interest rate, and due date will remain the same. Your loan servicer (which may be your original lender or a separate company) typically continues to service your loan, meaning you’ll send your payment to the servicer. It will keep a small portion of your mortgage to cover its costs for mortgage servicing, while sending the rest to the buyer of your note.
It’s helpful to understand the role of mortgage servicer vs. mortgage lender, so that if you have any questions about mortgage payments, you know whom to contact. If your servicer changes for any reason, you’ll be notified of the new servicer and the new way to remit your mortgage payment.
Different Kinds of Mortgage Notes
There are different types of mortgage loans and different kinds of mortgage notes to accompany them.
Secured Loans
With a secured mortgage note, the mortgage uses collateral to secure the property. The collateral is usually the property itself. A secured loan is usually accompanied by better terms, such as a lower interest rate and a longer repayment period.
Private Loans
Private mortgage notes are secured by private lenders. A seller may own the property outright and act as a private lender, setting their own terms for mortgage loans.
Institutional Loans
Institutional notes are mortgage notes issued by traditional lenders, such as financial institutions or banks. They’re highly regulated. Buyers must meet specific criteria, and the loans must have standard interest rates and repayment terms.
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The Takeaway
Understanding what is a mortgage note and how one works is a critical step in buying and financing a home. You should review the terms of your mortgage well before you arrive at the closing, and it may be helpful to review the details of the mortgage note with a professional, as the note can protect the buyer just as much as the lender.
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FAQ
What happens to my mortgage note when I refinance?
A refinance results in an entirely new mortgage, so your old mortgage will be paid off with the funds you borrow via your new mortgage, and your old mortgage note discharged. Your original note will be marked “paid in full.” You’ll then emerge with a new mortgage note, as well as a new payment amount and payment schedule.
Can I get a copy of my mortgage note?
You should receive a copy of your mortgage note during the closing process, but if you need another copy, you can first check your online home loan account. If you cannot find a copy to download there, reach out to your mortgage loan servicer or lender. The company is required to respond to written requests for loan documents.
What is the difference between a mortgage note and a deed of trust?
Both a mortgage note and a deed of trust can be used in a home purchase to create a lien on a property when the buyer borrows money from a lender. The key difference between the two is that the mortgage note is an agreement between borrower and lender, while a deed of trust includes those two parties but also a third party to whom the deed will be entrusted, such as a title company or a bank. Both documents allow the lender to foreclose on the home if the borrower fails to make mortgage payments. In some states, one or the other document is used and in many states both documents are used.
What happens if a borrower defaults on a mortgage note?
Failing to make mortgage payments on time or in full, or to meet other obligations spelled out in the mortgage agreement (such as maintaining homeowners insurance) can ultimately lead to the home going into foreclosure. The path from a missed payment to loss of a property has many steps, from loss mitigation measures designed to prevent homeowners from going into foreclosure, to a formal notice of default, a legal proceeding, and ultimately a potential sale of the property to a new owner. In addition to losing the home, the borrower risks long-term credit score damage.
Does a mortgage note change when my loan is sold?
A mortgage note doesn’t change when a property is sold. You’ll receive a notice that the loan has changed hands, but your payment amount, payment due dates, and other details of your mortgage note will remain the same.
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