Promissory Note and Mortgage Note Differences?

Promissory NoteA Promissory Note and a Mortgage Note are terms that are often used interchangeably in the purchase and sale of real estate.  Each document however is different in form and purpose consequently if you are considering seller financing of property you should be clear on the differences.

The promissory note is the formal binding document between the lender and the borrower.  It specifies the promise to pay back the loan under a specific set of conditions.   While the mortgage note document provides the security guarantee for the payment of the loan specified in the promissory note.  (The mortgage note is also often referred to as a deed of trust).  Let´s review some of the differences between the two types of documents.

Promissory Note Contents

This document defines the conditions of the lender and borrower for the payment of the loan which include:

  • the lender´s name, rights and responsibilities
  • the borrower´s name, rights and responsibilities
  • the description  of the property, if a real estate loan
  • the interest rate, how calculated, fixed or adjustable
  • the amount and term of the loan
  • the frequency of payment (monthly, quarterly, etc.)
  • whether payment is interest only or with principal
  • charges for late payment, etc.

The lender holds the promissory note during the time the loan is outstanding.  When the loan is fully paid off, the promissory note is relinquished and given to the borrower.  The promissory note is NOT recorded in the county land records, unlike a mortgage note.   This type of note can be used for a variety of loans types including commercial, student, bank, and real estate.  Therefore a promissory note does not necessarily have to be a loan related to physical property.

Promissory notes can be transferred or sold to a new owner by being endorsed (signed over) by the lender because they are negotiable financial instruments.  They are valuable and can be sold in the secondary market.

Mortgage Note Contents

This document provides the security (guarantee) for the loan described in the promissory note and   includes:

  • the lender´s name
  • the borrower´s name
  • the address and description of the property
  • the lender´s right to demand full payment for the balance of the loan in the event the borrower defaults on the loan
  • the means the lender has to begin foreclosure proceedings, including sale of the property

The mortgage note, unlike the promissory note, IS recorded in the county land records after the borrower has signed it.  Once the loan has been paid off by the borrower, the lender will record this with the county land records.

Consequently, the purchaser of the property (borrower) will at a minimum be signing two documents, the promissory note and the mortgage note.  This happens whether the property is purchased is via traditional institutional (bank) or private seller financing.

For additional information on how to sell your private mortgage note, please contact Nexus Advantage Services at 888-213-8313.

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