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.
What Is a Mortgage Note?
A mortgage note, often referred to as a promissory note, is what you sign when you agree to take on the responsibility of a mortgage. 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 homebuyers can remit payment
• Consequences buyers face if they do not pay
It’s one of the key documents you’ll sign at closing.
Promissory notes also may be used in owner-financed home sales. The buyer and seller sign the document, which contains the loan terms. When a borrower pays the seller directly, the promissory note gives the lender the ability to enforce their rights through a lien, foreclosure, or eviction.
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.
• Borrower’s right to prepay. This section specifies a borrower’s ability to pay toward the mortgage principal without penalty.
• 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.
How Does a Mortgage Note Work?
A mortgage or promissory note is drawn up by the lender when preparing your mortgage for closing during the underwriting process. This document is what makes the terms and conditions of the mortgage legally binding.
Borrowers will see the mortgage note at closing, though the terms and conditions will be outlined in a 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.
A mortgage note is 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.
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 easy to tell who holds your mortgage note. This is because the loan servicer 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. When the mortgages are sold, the lender doesn’t have to keep the mortgage on their balance sheet, which, in turn, allows them 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.
The lender does continue to service your loan, meaning you’ll send your payment to them. The lender will keep a small portion of your mortgage to cover their costs for servicing your loan while sending the rest to the buyer of your note.
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. However, If your mortgage note is sold to another servicer, 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.
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 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 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.
Understanding your mortgage note and how it works is a critical step in buying and financing a home. It may be helpful to review the mortgage note with a professional, as the note can protect the buyer just as much as the seller.
The journey to the closing table can be vexing, so it can be helpful to have your questions regarding mortgages answered by a knowledgeable loan officer.
And this help center for mortgages might come in handy.
When you’re ready for a home of your own, consider SoFi home loans and check out SoFi mortgage rates.
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