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).

When you take out a loan to buy a home, you're 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.

The Promissory Note: Like an IOU

Homebuyers usually think of the mortgage or deed of trust 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. A promissory note is basically an IOU that contains a promise to repay the loan, and the terms for repayment. 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 or deed of trust, 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 and Deeds of Trust: Security for the Loan

The purpose of the mortgage or deed of trust is to provide security for the loan that's evidenced by a promissory note. Along with standard covenants between the lender and borrower, the mortgage or deed of trust contains an acceleration clause. This clause permits the lender to demand that the loan's entire balance be repaid if the borrower defaults (by not making payments, for example).

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 or deed of trust is sold to satisfy the underlying debt.

The mortgage or deed of trust will also state the:

  • borrowers' names
  • 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 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.

Loan Transfers

Banks often sell and buy mortgages and deeds of trust from each other.

Assignments

An “assignment” is the document that's the legal record of the transfer of the mortgage (or deed of trust) from one bank to another. Each assignment is generally supposed to be recorded in the county land records. Though, if the mortgage or deed of trust 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. This entity acts as the nominee for each holder (loan owner), eliminating the need for separate assignments when the loan is transferred.

Endorsements

When a 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. So, any party that possesses the note has the legal authority to enforce it.

To learn more about the differences between assignments and endorsements, see What's the difference between a mortgage assignment and an endorsement (transfer) of the note?

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