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what is a mortgage note

A mortgage note is a legal document which, together with a promissory note, describes the terms of the loan agreement between lender and borrower. It is signed at the end of the closing process when purchasing a home or other real property that is used as collateral to secure the loan. Key elements include the principal amount borrowed, interest rate, amount of monthly payment and length of time the borrower has to pay the money back.

For more help with mortgage notes and other homebuying concerns, find a financial advisor.

Mortgage Note Details

The mortgage note document consists of several pages that lay out all the details of the loan agreement. At the end are lines for the signatures for borrower and lender. In some states, a deed of trust will be used a closing and there won’t be a mortgage note.

The first thing the note does is identify the lender and the borrower. It will also provide the address of the property that is being purchased and will secure the loan.

The note next describes the dollar amount of money that is being loaned, the principal. It also states that the borrower will repay that amount plus interest to the lender. The amount of the required down payment, if any, is also given.

The interest rate charged on the loan is another vital element. This interest rate is given as a yearly rate in percentage. If the note is an adjustable rate loan, the interest rate will be the initial rate. It will also describe how the rate will adjust in future.

The term of the loan is given in months. This is the number of monthly payments that will be made if the note is paid off as scheduled. Dividing the number of months 12 gives the number of years. So a typical 30-year mortgage would call for 360 payments.

The dollar amount of each of the monthly payments is also specified. This will include principal and interest on all loans. If a portion of the cost of property taxes and hazard insurance on the home are to be included in the monthly payment and help in escrow until taxes and insurance premiums are due, this amount will also be included here.

The date the payments are due is set forth. The note will give this date as occurring on a given day of each month until the loan is fully repaid. Usually, payments are monthly. However, sometimes payments will be set up to occur bimonthly. In that case the note will give the dates every month that  each payment is due.

The note also says how the payments are to be made. Typically, this will be in cash, by check or money order. It will also give an address to which payments are to be mailed.

Rights and Obligations

what is a mortgage note

The promissory note portion of this document lays out all the preceding business. The mortgage note is the portion that informs everyone what will happen if the borrower doesn’t repay the loan as described.

The mortgage note will say, for example, say how many days after the due date for a payment have to pass before an unpaid amount is considered late. And the note will lay out the amount of the late charge that the borrower agrees to pay if a payment is made after that date.

The note also gives rights to the borrower. For instance, the borrower will generally be granted the right to prepay the loan. The mortgage note will state how this can happen and what, if any, prepayment penalty the borrower will owe if the loan is paid off early.

If there are any co-signers on the note, the document will describe their obligation. This obligation will consist of every obligation of the primary borrower. That is, the co-signers are also agreeing to see that the note is paid off as required.

Finally, the note will inform the borrower that the lender may sell the note on the secondary mortgage market. By signing, the borrower will agree to pay the new holder of the note just as if the original lender still owned it.

When the closing is done and all documents are signed, the borrower will get a copy of the signed mortgage note. When the last payment on the note is made, the borrower will get the title to the home. If the borrower defaults on the loan, the lender or current owner of the note will be able to produce the original copy in order to foreclose on the home and take possession of it.

The Bottom Line

what is a mortgage note

A mortgage note lays out all the terms of the agreement between borrower and lender when a homebuyer is financing the purchase of a new home. Key elements of the promissory note section include the amount borrowed, interest rate, due date for payments and dollar amount of each monthly payment. The mortgage note specifically says what will happen if the borrower fails to make payments, ranging from late fees that will be imposed all the way up to foreclosure.

Homebuying Tips

  • A financial advisor can help you evaluate how to fit the purchase a home into your overall financial strategy. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • It is critical that a mortgage note is accurate. Borrowers are advised to read their notes carefully before signing, request explanations of anything that is unclear and have any errors corrected immediately.

Photo credit: ©iStock.com/AaronAmat, ©iStock.com/BrianAJackson, ©iStock.com/wutwhanfoto

Mark Henricks Mark Henricks has reported on personal finance, investing, retirement, entrepreneurship and other topics for more than 30 years. His freelance byline has appeared on CNBC.com and in The Wall Street Journal, The New York Times, The Washington Post, Kiplinger’s Personal Finance and other leading publications. Mark has written books including, “Not Just A Living: The Complete Guide to Creating a Business That Gives You A Life.” His favorite reporting is the kind that helps ordinary people increase their personal wealth and life satisfaction. A graduate of the University of Texas journalism program, he lives in Austin, Texas. In his spare time he enjoys reading, volunteering, performing in an acoustic music duo, whitewater kayaking, wilderness backpacking and competing in triathlons.
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