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

Most people who take out a loan to buy a home sign two primary documents: a mortgage (or deed of trust) and a promissory note.

The mortgage. Homebuyers usually think of a "mortgage" as a loan. But a mortgage is the contract you sign with the lender to provide security (collateral) for a loan. The mortgage gives the lender the right to sell the property through a foreclosure and use the proceeds from the sale to recoup its money if you fail to make the loan payments. In some states, a deed of trust is used instead of a mortgage. In this article, the terms "mortgage" and deed of trust mean the same thing.

The promissory note. The promissory note, a contract separate from the mortgage, is the document that creates the loan obligation. This document contains the borrower's promise to repay the amount borrowed. If you sign a promissory note, you're personally liable for repaying the loan.

So, by signing a promissory note, you promise to repay the amount you've borrowed, usually with monthly payments. Signing a mortgage gives the lender a way to get its money back if you don't make those payments—through a foreclosure.

What Is a Mortgage?

Again, by signing a mortgage, you put the home up as collateral for the loan. Here are some of the main features of a mortgage.

• A mortgage sets out your responsibilities for taking care of the property, like keeping the home in good shape and maintaining homeowners' insurance.
• The lender records the mortgage in the county land records, creating a lien on the property. The mortgage contains the legal description of the property so that it attaches to that particular property.
• Along with standard covenants between you and the lender, the mortgage contains an "acceleration clause." This clause permits the lender to demand that you repay the loan's entire balance if you default, like by not making payments.
• If you don't repay the entire loan amount after acceleration, the mortgage describes when and how the lender may foreclose.
• The mortgage doesn't obligate you to repay the loan. You aren't personally liable for repaying the debt if you sign the mortgage, but not the promissory note.

What Is a Promissory Note?

A "promissory note" is like an IOU. It contains the borrower's promise to pay off the debt and the terms for repayment.

• The note includes the loan terms, like the interest rate (fixed or adjustable), the late charge amount, the amount of the loan, and the term (number of years).
• A promissory note isn't recorded in the county land records. The lender holds on to the note.
• The note gives the lender the right to collect on the loan if you don't make payments.
• When the borrower pays off the loan, the note is marked as "paid in full" and returned to the borrower.
• Only those who sign the promissory note are legally responsible for repaying the lender.

Documents Lenders Use to Transfer Loans

Banks and mortgage companies often sell and buy home loans from each other. The documents a lender uses when selling a home loan are called "assignments" and "endorsements."

What Is a Mortgage Assignment?

An "assignment" transfers the mortgage from one lender to another. Like a mortgage, the lender records an assignment in the county land records.

Generally, each assignment must get recorded. However, in some cases, the mortgage (or a later assignment) designates Mortgage Electronic Registration System, Inc. (MERS) as a nominee for the lender. In that situation, MERS tracks the loan transfers in its computerized system, eliminating the need for separate assignments when the loan is transferred.

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. Whoever holds the note has the legal authority to enforce it and has standing to foreclose.

What If I'm on a Mortgage But Not the Note?

If you take out a home loan and are on the property's deed, you'll likely have to sign the mortgage. But even if the lender requires you to sign the mortgage, you might not have to sign the note.

For example, say you're not eligible for a home loan at a good interest rate because your credit scores are terrible. Your spouse, however, has excellent credit and easily qualifies for a loan. The lender agrees to lend to your spouse and doesn't include you as a borrower on the promissory note. But because you're both on the home's deed, the lender requires you both to sign the mortgage.

Your spouse is legally responsible for repaying the loan, but you've both given the lender permission to foreclose if that doesn't happen. In the case of a foreclosure, depending on state law and the circumstances, the lender might be able to get a deficiency judgment against your spouse, but not you.

What Happens If I Pay Off the Loan in Full?

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. This document removes the mortgage lien from the property.

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.

Consider talking to a foreclosure attorney if you're worried about a possible foreclosure.