What's the Difference Between a Mortgage and a Promissory Note?

Learn the difference between a promissory note and a mortgage (or deed of trust).

By , Attorney

Most people who take out a loan to buy a home sign two main documents:

Homebuyers usually think of the mortgage as the contract they're signing with the lender to borrow money to buy a house. But the promissory note is the document that contains the promise to repay the amount borrowed. The purpose of the mortgage is to provide security for the loan that's evidenced by a promissory note.

Those who sign the note are personally liable for repaying the amount borrowed. But signing a mortgage contract doesn't make you responsible for repaying the debt.

A Promissory Note Is Like an IOU

A "promissory note" is like an IOU. It contains the borrower's promise to pay off the debt and the terms for repayment. Only those who sign the promissory note are legally responsible for repaying the lender.

The note includes the:

  • borrowers' names
  • property's address
  • interest rate (fixed or adjustable)
  • late charge amount
  • amount of the loan, and
  • term (number of years).

Unlike a mortgage, the promissory note isn't recorded in the county land records. The lender holds the promissory note while the loan is outstanding. When the loan is paid off, the note is marked as "paid in full" and returned to the borrower.

Mortgages: Security for the Loan

Again, the mortgage secures the loan. So, by signing a mortgage, you put the home up as collateral for the loan.

The mortgage states the borrowers' names, the property address, and the property's legal description. It also contains all of the important terms and conditions of the deal. Along with standard covenants between the lender and borrower, the mortgage contains an "acceleration clause." This clause permits the lender to demand that the loan's entire balance be repaid if the borrower defaults, like by not making payments. Generally, the lender must provide notice to the borrower before accelerating the loan. If the borrower doesn't cure the default, the lender may begin foreclosure proceedings. "Foreclosure" is the legal process where real estate that's secured by a mortgage is sold to satisfy the underlying debt.

The mortgage is recorded in the county land records, usually shortly after the borrowers sign it. But the mortgage doesn't create an obligation for you to repay the money borrowed.

If and when the loan is fully repaid, the lender will record a release (or satisfaction) of mortgage or a reconveyance of deed (used in conjunction with deeds of trust) in the county land records.

What Documents Are Used In Loan Transfers?

Banks and mortgage companies often sell and buy home loans from each other. These entities use "endorsements" and "assignments" to transfer promissory notes and mortgages to someone else.

How Promissory Note Endorsements Work

When a loan changes hands, the promissory note is endorsed (signed over) to the loan's new owner. In some cases, the note is endorsed in blank, making it a bearer instrument under Article 3 of the Uniform Commercial Code. So, in that situation, any party that possesses the note has the legal authority to enforce it.

What Is a Mortgage Assignment?

An "assignment" is the document that's the legal record of the mortgage transfer from one holder (loan owner) to another. Each assignment is generally supposed to be recorded in the county land records.

Though, if the mortgage designates Mortgage Electronic Registration System, Inc. (MERS) as the mortgagee, solely as a nominee for the lender, then MERS tracks the transfers of the loan in its system. MERS acts as the nominee for each holder, eliminating the need for separate assignments when the loan is transferred.

Talk to a Lawyer

If you're taking out a home loan and need help understanding the terms and conditions, consider talking to a real estate attorney before you sign the documents. If you're worried about a possible foreclosure, consider talking to a foreclosure attorney.

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