What is a Mortgage Note?

Buying a home is an exciting time. If you're like millions of other buyers around the country, you will need a mortgage to buy the home. In that case, you’ll be required to sign your mortgage note at closing. A mortgage note or promissory note outlines the terms of the agreement and includes critical information such as the amount you owe, your interest rate and what happens if you don’t repay the loan. Read on to understand the ins and outs of mortgage notes so you're better prepared at the closing table. 

Understanding Mortgage Notes

A mortgage note is a legally binding agreement between you as the borrower and the lender. The mortgage note is your agreement to repay the home loan. When you sign a mortgage note, you give the lender the right to foreclose on a property if you fail to make on-time payments according to the contract terms.

Like any legal agreement, it's essential to read the terms and conditions carefully and make sure you understand all the details. If there is a term you don't agree with, contact your lender and see whether the mortgage contract can be renegotiated. 

For example, some mortgage notes may include an early repayment penalty. If you plan to make even one extra mortgage payment per year, you could own the home outright about two and a half years early for a 30-year mortgage. You'll also save significantly on interest payments with that strategy, but only if you don't get hit with an early repayment penalty. 

It's a good idea to have a real estate attorney go over the mortgage note with you and ensure that there are no unusual conditions and that you fully understand all terms. You shouldn't sign the mortgage note unless both sides agree on the contents of the document. 

Be sure you understand everything you’re responsible for, including monthly payments, the lenders' right of foreclosure and other terms, contingencies, fees or penalties. 

What Are the Details in a Mortgage Note?

The terms included in mortgage notes or promissory notes include:

• Total loan amount 
• Down payment amount
• Repayment terms, including monthly or bimonthly payments 
• Interest rates, including whether the mortgage is fixed or adjustable rate
• Any prepayment penalty clauses
• Monthly payment amounts
• Foreclosure policies
• Policies regarding notices between the lender and borrower

You can see an example of a mortgage note from the U.S. Department of Housing and Urban Development. 

What Is a Mortgage Promissory Note?

A mortgage promissory note outlines the terms to pay back the loan to the lending institution. A mortgage promissory note includes details like the loan interest rate, whether it's fixed or variable and repayment terms. It may also include the procedures the lender must follow if the borrower fails to repay the loan according to the stated terms. 

In deed of trust states you will not get a mortgage note or a mortgage promissory note. Instead, you will get a deed of trust. Whether you get a deed of trust or a mortgage promissory note, reading through the contents with a real estate lawyer can help ensure that the document protects you as much as possible.

Who Holds the Mortgage Note?

A mortgage note is a security instrument that can be bought and sold on the secondary mortgage market. If you get a conforming loan, your mortgage lender will usually sell the mortgage note to Frannie Mae or Freddie Mac, which then bundle it with other mortgage notes and sell them on financial markets to real estate investors.

In that case, the real estate investors who purchase the bundle of mortgage that includes your property technically own a mortgaged property. Investors use mortgage notes as a low-risk, asset-backed investment with regular cash flow from interest payments.

Regardless of whether your lender retains your mortgage note or sells it, you're obligated to pay the full agreed-upon repayment each month or bi-monthly. Even if the mortgage note changes hands, you're obligated to meet all mortgage note terms until the loan is paid in full. 

Once the mortgage is repaid in full, you will receive the original mortgage note marked as paid in full, along with the deed to your home.

What Happens if You Default on the Mortgage?

If you default on your mortgage, there is a cascade of events that are set into motion. First, your lender will start the foreclosure process. The time of foreclosure will vary based on the state you're living in. It will also negatively affect your credit score and can have long-reaching financial implications. 

What Happens if You Decide to Prepay the Home Loan?

If you decide to prepay the home loan, the implications depend on the terms outlined in your mortgage note. If there is no prepayment penalty, you could save on interest and own the home sooner by prepaying the home loan. However, if the mortgage note includes a steep prepayment penalty, the costs can be greater than the potential benefits. 

What Happens if You Pay Off the Mortgage in Full?

If you pay off the mortgage in full, the mortgage note is returned marked as paid in full or canceled. You will receive the deed to your home. If you pay off the mortgage in full, the transfer happens in the process of closing on the sale and signing the closing documents with the buyer. 

Get the Best Home Loans from Benzinga’s Top Mortgage Lenders

Find Benzinga's top mortgage lenders with unique, competitive offers to save more on the home of your dreams. 

Implications of Mortgage Notes for You

A mortgage note is a legal agreement between the lender and borrower of a mortgage and is one of the most important documents you'll sign when closing on a new home. The mortgage note outlines the mortgage agreement including repayment terms, interest rate and prepayment penalties and foreclosure procedures. 

Take the time to fully understand the mortgage note before signing, and consider working with a real estate agent to come to an agreement based on your goals. Ready to buy a home? Learn more about the mortgage process, then find the best mortgage lenders.

Frequently Asked Questions