Note (Promissory Note)
A promissory note is a written promise to repay a debt. Explore how notes are used in mortgages and can be bought and sold.
Definition
A promissory note is a legal document in which one party (the maker) promises in writing to pay a specified sum of money to another (the payee) at a future date or on demand. In real estate, a promissory note outlines the borrower’s promise to repay the mortgage loan, including interest rate, repayment schedule, and consequences of default. The note is secured by a separate mortgage or deed of trust on the property. Lenders and investors can buy and sell promissory notes as investments, transferring the right to receive payments.
Why It Matters
Two separate documents make up what people call a mortgage: the note is your promise to pay, and the deed of trust is what lets the lender take the house. The note is the piece that gets sold, so the company you mail payments to next year may not be the one you closed with. It also fixes your late fee, your prepayment terms and whether the rate can move.
Examples
Over five years, a 30-year fixed note at 6.5 percent is sold three times. The rate, term and payment never change, because the note travels intact.
A seller carrying back $150,000 signs a note at 7 percent with a 5-year balloon, then sells that note to an investor for $128,000 in cash.
A homeowner requests a payoff quote and finds a clause charging 2 percent of the balance for prepayment inside the first three years, adding $6,800 to the amount due.
Tips
Read the late fee and grace period language before signing. Most notes allow 15 days and then charge 4 to 5 percent of the payment, which is real money on a $3,800 payment.
Keep your signed copy permanently. When a servicer asserts a balance you disagree with, the note controls how interest accrues and which fees are even allowed.
On a seller-carried note, add a clause requiring written notice of any assignment. Without it you can end up mailing payments to a note buyer you have never heard of.
Related Terms
Owner Financing
Owner financing occurs when sellers finance the sale for the buyer. Discover benefits, risks, and co...
Deed
A deed is the legal document that transfers real property ownership. Discover types of deeds and ess...
Offer
An offer is a formal proposal to buy property at specified terms. Understand how earnest money, cont...
Ready to Use Your Real Estate Knowledge?
Now that you understand Note (Promissory Note), let Wayber help you navigate your real estate journey. Our flat-fee service saves you thousands while providing expert guidance.