When you take out a loan to purchase a home, you are required to sign two documents: a promissory note and a mortgage (or deed of trust). Read on to learn the difference between these documents and how they relate to your mortgage transaction.
(To learn more about mortgage terminology, see our Mortgage & Foreclosure Terminology topic area.)
Homebuyers usually think of the mortgage or deed of trust as the contract they are signing with the lender to borrow money to purchase a house, but it is actually the promissory note that contains the promise to repay the amount borrowed.
A promissory note is basically an IOU that contains the promise to repay the loan, as well as the terms for repayment. The note includes the:
- name(s) of the borrower
- property address
- interest rate (fixed or adjustable)
- late charge amount
- amount of the loan, and
- term (number of years).
Unlike a mortgage or deed of trust, the promissory note is not recorded in the county land records. The lender holds the promissory note while the loan is outstanding. When the loan is fully paid off, the note will be marked as paid in full and returned to the borrower.
Mortgages and Deeds of Trust
The purpose of the mortgage or deed of trust is to provide security for the loan that is evidenced by a promissory note.
Along with standard covenants between the lender and borrower, the mortgage or deed of trust will contain an acceleration clause that permits the lender to demand that the entire balance of the loan be repaid if the borrower defaults on the loan (by not making payments, for example). If the borrower does not pay the indebtedness due on the promissory note, then the real property can be sold to satisfy the debt.
Generally, the lender is must provide notice to the borrower before it can accelerate the loan. If the borrower does not cure the default, the lender may begin foreclosure proceedings. Foreclosure is the legal process where real estate secured by a mortgage or deed of trust is sold to satisfy the underlying debt as evidenced in the promissory note. (Learn more about foreclosure, options to avoid it, defenses to foreclosure, and more, in Nolo's Foreclosure topic area.)
The mortgage or deed of trust will also state the:
- names of the borrowers
- property address, and
- legal description of the property.
The mortgage or deed of trust is recorded in the county land records, usually shortly after the borrowers sign it.
If the loan is fully paid off, the lender will record a release (or satisfaction) of mortgage or a reconveyance of deed (which is used in conjunction with deeds of trust) in the county land records.
Banks often sell and buy mortgages and deeds of trust from each other.
Assignments. An “assignment” is the document that is the legal record of the transfer of the mortgage (or deed of trust) from one bank to another. Each assignment is supposed to be recorded in the county land records.
Endorsements. When the loan changes hands, the promissory note is endorsed (signed over) to the new owner of the loan. In some cases, the note is endorsed in blank, which makes it a bearer instrument under Article 3 of the Uniform Commercial Code. This means that any party that possesses the note has the legal authority to enforce it.
(To learn more about the differences between assignments and endorsements, see our article What's the difference between a mortgage assignment and an endorsement (transfer) of the note?)