Key Takeaways
- A mortgage is a loan secured by real estate, such as land or buildings.
- A promissory note, also known as a mortgage note, is a written agreement that outlines the mortgage loan terms.
- Promissory notes are legally binding documents that require the borrower to repay the lender for the mortgage loan; they are separate from the mortgage itself.
Mortgage vs. Promissory Note Explained
A mortgage and promissory note are two different contracts that act as protectors for the lender. The promissory note designates who is legally responsible for paying back the loan, along with laying out the payback plan and interest rates.
The mortgage doesn’t require the borrower to repay the loan, instead, it gives the lender the right to take your property as collateral if you fail to follow the repayment plan.
Because there are secured and unsecured loans, you can have a promissory note without a mortgage — which is considered an unsecured loan. However, you typically can’t have a mortgage without a promissory note, according to Chase Bank. The promissory note is a crucial legal document to protect the lender.
Learn more about mortgages and promissory notes to better understand their purpose and potential selling options.
A promissory note can be just as enforceable as a mortgage loan, but the difference is the promissory note is not recorded in the county land records like a mortgage – but rather it is kept with the lender.
Ebony J. Howard, CPAAccounting, Personal Finance and Income Tax ConsultantEbony J. Howard is a certified public accountant and freelance consultant based in Atlanta, Georgia. Ebony has a deep knowledge of the financial landscape and a background in accounting, personal finance and income tax planning and preparation.
What Is a Promissory Note?
The promissory note is exactly what it sounds like — the borrower’s written, signed promise to repay the loan.
Promissory notes, also known as mortgage notes, are written agreements in which a borrower promises to pay the lender a certain amount of money at a later date. Banks and borrowers typically agree to these notes during the mortgage process.
When a borrower takes out a loan, promissory notes legally bind them to repay it. If the borrower fails to repay the loan, the note allows the lender to enforce their rights through a lien, foreclosure or eviction.
Information in a Promissory Note
- Exact amount borrowed (which is the total amount you owe on the mortgage)
- Interest rate
- Down payment amount
- Your full legal name
- Name of the lender
- The repayment plan (including the start date and maturity date of the loan)
- Consequences if you fail to repay your loan
Source: Credit Union of Southern California
Promissory notes also help private loan owners safeguard the lending process. When a borrower pays the seller directly, mortgage lenders or banks are not involved. Owner financing refers to a loan from a private entity, as opposed to a traditional lender.
What Is a Mortgage?
A mortgage is a loan specifically for financing real estate. According to the Consumer Financial Protection Bureau, a mortgage gives the lender the right to take your property if you fail to repay the money you borrowed. During the repayment period, the title of the house is used as collateral to secure the loan.
Information in a Mortgage
- Closing costs of the loan, including the lender’s fees
- The loan term, or how long you have to repay the loan
- Whether the loan has other risky features, such as a pre-payment penalty, a balloon loan, an interest-only feature or negative amortization
Source: Consumer Financial Protection Bureau
Many consumers do not have the cash to purchase a property outright. Roughly 96.5 million households are unable to afford a median-priced home so far in 2023, according to the National Association of Home Builders. Mortgages are essential for Americans to become homeowners.
Some states use a deed of trust instead of mortgages. Both use the property as collateral for the loan, but the deed of trust involves a trustee.
What Can Be Sold?
A promissory note can be sold by the owner if they no longer want to be responsible for the loan or need a lump sum of cash. The mortgage note buyer assumes the responsibility of collecting the money.
Selling your mortgage is essentially transferring property from one party to another.
You can only sell your mortgage after the loan is paid off entirely, at which point the bank or private seller fills out the deed transferring title. This is the final step to fully owning a home or property. Once the title is acquired, the borrower becomes the owner and has the right to do what they please with the property.
Promissory Note vs. Mortgage FAQs
A promissory note without a mortgage is unsecured, which means you have legal obligation to repay a loan, but no property to secure that obligation.
If the lender dies, the borrower is still under a legal obligation to continue paying their loan, unless the note clearly states death will cancel any remaining debt.
A promissory note’s worth varies depending on the present value, expected payments and how much you intend to sell. The buyer can purchase the entire note or make a partial note purchase.
