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What Is a Mortgage Note?

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Taking out a mortgage is a big deal. There's a slew of new terms to learn -- like "mortgage note" -- and details to understand. Here, we'll explain what a mortgage note is, how it differs from a mortgage loan, and offer you insight to help you feel comfortable in comparing mortgages.

What is a mortgage note exactly?

A mortgage is a loan that allows you, as the borrower, to finance a home. The loan pays the seller in full for the property. In return, you make monthly payments to repay the amount you borrowed. The entire transaction is detailed in a mortgage note, also called a promissory note. When you borrow money to purchase a home, the lender provides you with a copy of the mortgage note. To protect you and the lender, this note tells you everything about the loan so there are no misunderstandings.

Just as you are provided a list of required documents for a mortgage application and must provide those documents, a lender has a list of documents they must provide to you. Each of these documents is designed to help you understand the mortgage into which you are entering.

A mortgage note is not to be confused with other forms provided by the lender, such as the loan estimate or closing disclosure. Each form is clearly marked. Once you sign a mortgage note, you're a homeowner, and are legally obliged to carry through with the agreement to repay the real estate debt.

What can I learn from a mortgage note?

Among the information found in a real estate mortgage note is the following:

  • The name of the lender and borrower
  • Type of loan (for example, if it's a conventional loan)
  • Amount of your down payment
  • Loan amount
  • Interest rate
  • If the interest rate is fixed or adjustable
  • When payments are due
  • Loan term
  • If the loan includes a prepayment penalty
  • What happens if you stop making payments

A promissory note is a legal document. If you or the lender don't comply with the agreement contained within the four corners of this legal document, the other party has the right to sue. For that reason, it's important to know exactly what the document says, and what you're promising.

It's important to know that a mortgage note gives the lender control of the property until you've repaid the debt in full. Let's say you take out a 30-year mortgage and make the monthly payment as promised for 10 years. During the 11th year, you stop making payments. The mortgage company has the legal right to begin foreclosure, repossess the property, sell it, and recoup its loss. Your home acts as the real property collateral the bank needs to feel secure in lending you a large sum of money.

The value of a mortgage note

If you take the time to read each word of the note, you can be sure you understand what you're committing to. There's a chance your home will be the largest financial investment you ever make, a fact that makes a mortgage note incredibly valuable. As you read the note, look for errors. For example, if you requested a fixed-rate loan and the note indicates that it's adjustable, you know that the note needs revision before you sign on the dotted line. If you asked for a 15-year mortgage and the note indicates that it's a 30-year note, make sure the lender gets it right before putting your name on the legal document.

The best mortgage lenders not only provide you with a mortgage note, they also walk you through it to make sure you're comfortable with what you're signing.

Part of an overall strategy

Mortgage notes help you plan for the future. The expenses of homeownership can come as a shock to buyers. Beyond the cost of the home itself on the day of closing, there are closing costs to consider. And once you move in, there's a steady stream of maintenance and repairs to pay for. There are everyday upkeep costs, as well as special expenses like property taxes and homeowners association (HOA) fees.

While a mortgage note can't help you pay any of those costs, it does serve as a planning aid. Let's say you purchase a home with an adjustable interest rate. The terms of how that rate can be adjusted should be included in your mortgage note. As you budget, you can refer to the note to see when a rate adjustment is due and the maximum percentage by which it can change.

Where do I get a copy of a mortgage note?

Let's say you lose your mortgage note and need a fresh copy. The easiest way to get a new copy is to request one from your loan servicer. This may be the bank or mortgage lender that provided the original note, or a new institution that has purchased your mortgage note (see below for details on that possibility).

You may also check with the county recorder's office in your county. Mortgages, deeds, and other legal documents are routinely filed through that office. It's possible you can request a copy directly through the county recorder's website.

What happens if my mortgage note is sold?

The lender made a legal agreement with you, and can't change the terms of that agreement mid-stream. So in order to get its money faster, it may sell your mortgage note to another party. This could be a bank, private entity, or another type of institution interested in mortgage note investing. The lender is legally required to notify you of the sale.

The important point: Note-buyers cannot change the terms of your mortgage note. The new mortgage holder buys the mortgage exactly as-is. The terms of the agreement are the same. Nothing should change except where you send the mortgage payment each month.

A mortgage note is a rather brilliant little tool for making sure you know what you're in for. Imagine starting a relationship with someone, and being able to lay out all that person expects of you over the next 15 to 30 years. It may not be perfect, but it would clearly outline your role in the relationship. A mortgage promissory note does just that: It tells you what's expected of you so there are no unpleasant surprises.

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