Mortgage note on table with house keys and pen.

Home Buying

What Is a Mortgage Note and Why Does It Matter?

October 29, 2018 | by Andrew Schmeerbauch

Mortgage note on table with house keys and pen.

When most people dive into the nitty-gritty of their mortgages, their eyes glaze over. While the ins and outs of mortgages are by no means extremely interesting to the general public, reading up on your mortgage note and why it even matters is important.

So sit down and buckle up, because we are about to give you the rundown of your mortgage note.

What is a mortgage note?

Also known as a promissory note, a mortgage note explains the terms of a mortgage, such as the interest rate, loan amount, monthly payments, and period of time in which you must pay your mortgage. It also outlines any penalties for missing payments.

Part reference, part contract, a mortgage note is a legally binding document that allows the holder of the note to repossess the property if you don't hold up your end of the deal.

Mortgage notes are typically associated with owner financing. Homes that are using owner financing do have a mortgage note, but they aren't the only ones. Any mortgage that goes through a private mortgage (that is, not through a bank), has mortgage notes as part of the process.

If you want a copy of your mortgage note, ask the individual or entity holding your note. They should be able and willing to send one over to you.

Are a mortgage deed and a mortgage note the same thing?

It's an easy mistake to make, but nope. Your mortgage note and mortgage deed are two separate things. You do need them both in a mortgage transaction, though.

Your mortgage deed is the deed to the piece of real estate that you took the mortgage out on. The mortgage deed is typically put on record with the local government. The promissory, or mortgage, note, on the other hand, describes the terms associated with the mortgage deed; the lien holder typically retains this note.

It can be a bit confusing so here's an example.

Say you want to buy a house worth $250,000. You go through a private lender to obtain a private mortgage because the property needs some repairs that other loans won't allow. That private lender then lends you the money, which you use to buy the house. Because you don't actually own the house yet (the lender does), the deed to the house goes to the lender with the mortgage note outlining the terms that you need to fulfill to pay back your debt and get full ownership of the deed.

Once you pay back your loan and all the terms are fulfilled, you will receive your mortgage note and gain full ownership of your deed.

Mortgage Notes for Real Estate Investing

You may have heard about people buying mortgage notes. If you're like the others asking, "What does it mean to buy a mortgage note?" then turn your listening ears on, my friend. This one's for you.

Your private lender can and (most likely will!) sell your mortgage note without your permission. It's nothing for you to worry about—it actually happens quite a bit. The terms of your mortgage won't change a bit (legally, they can't change your terms). The only difference is the address you'll send your check to (if you're still paying your mortgage with a check, instead of online).

Typically, lenders sell mortgage notes in bundles through mortgage note brokerages. These brokerages manage mortgages for thousands of home loans and sell them on the secondary market. Note buyers can choose to buy these notes for a buy out rate and take on the longterm gain of the mortgage payments.

If you want to start investing in real estate but don't want to search for properties, make repairs, and deal with tenants, purchasing mortgage notes might be for you.

Holding a mortgage note isn't for the faint of heart. You still need to do your due diligence to make sure the note you are holding is a good one and make sure both parties are upholding the terms of the note.

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Need help drafting your mortgage note? Your real estate agent is an excellent help in that department. Call us today at 1-833-2-CLEVER or fill out our online form to get started.

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