What Is A Mortgage Note
When asked what is a mortgage note, most people explain it as the loan they get when they purchase a home. When someone needs to borrow money to buy a property, they refer to these borrowed funds as a mortgage. We know exactly what it means if someone says "I have to apply for a mortgage" or a realtor suggests you get "prequalified for a mortgage" before you start house shopping. Many consider a mortgage to be synonymous with the loan needed to purchase a property.
So what is a mortgage note? Is a mortgage the same thing as a mortgage note? Are the terms interchangeable? A mortgage is not the same thing as a mortgage note, however, it is a part of a mortgage note. A mortgage note consists of two separate documents. A promissory note and a mortgage.
The first legal document comprising a mortgage note is the promissory note. When you sign a promissory note you are agreeing to repay your mortgage.
A promissory note also referred to as the "note" provides the details of your loan. These include but are not limited to:
- The names of the lender and borrower.
- The loan amount
- The down payment amount
- The rate of interest
- When the payments are due
- The terms of the loan
- Any prepayment penalties
- The consequences if you stop making your monthly mortgage payments
- Any other terms agreed to by both lender and borrower
The other legal document that is part of a mortgage note is the mortgage which is a type of loan document that is secured by the real estate. The mortgage is also called a Security Instrument or a Deed of Trust. The important points to remember about a mortgage are:
- A mortgage give the mortgage provider the right to take the property by foreclosure if you fail to pay as agreed.
- A mortgage explains your responsibilities and rights as a borrower.
- A mortgage restates the basic information that's included in the promissory note.
An easy way to remember the difference between a note and mortgage is to think of the note as the document that says you promise to repay the loan and the mortgage as the document that offers security or collateral for the loan's repayment.
In its simplest form, a dollar bill or a signed check are both examples of a promissory note. They are both promises to pay whatever the currency or check amount is. The illustration of a mortgage can also be seen with a dollar bill or check in that the issuer of the dollar or check is secured by the government or checkwriter's financial strength.
Although there is a difference between a note and mortgage, these two documents work together to spell out the responsibilities of both lender and borrower, the financial details and security of the loan. Together they become known as a mortgage note.
What Is A Mortgage Note In The Private Mortgage Market?
The lion share of mortgage notes are originated by the banking industry. On the other hand a large subgroup in the mortgage market are private mortgages.
Seller financing is one form of a private mortgage. Private in that the lender is the real estate seller who agrees to lend his buyer a portion or all
of the property's purchase price.
Since this seller financed private mortgage note is provided by a private person or company, they create their own rules, guidelines and qualification requirements, which could be different for each borrower. Private mortgage loans can be riskier than conventional bank loans and often command a higher than the market interest rate. These higher interest rate private mortgage notes are attractive to investors as either buy and hold investments or are sold for cash in the secondary mortgage market.
The amount the secondary mortgage market will pay for these mortgage notes depends on a combination of the principal balance, number of remaining payments, the seasoning of the note (the number of payments made), the value of the property, the buyer's (borrower's) creditworthiness and most importantly,
the concept of the time value of money (receiving a sum of money is worth more today then receiving the same sum of money in the future).
Private mortgage notes are more appealing to those that have a difficult time getting a loan from a traditional lender. There are a number
of reasons why a borrower doesn't fit into the qualifying requirements for a traditional mortgage. It's not only because the borrower has a
poor credit score or credit history. Many self employed borrowers have great credit but don't qualify due to the bank's requirement. Sometimes
the property itself doesn't qualify due to the lender's guidelines.
Let's just leave it as, a traditional lender want to minimize their risk and have created guidelines to do just that.
Even though there is potentially more risk with private mortgage notes than traditional mortgages, they do fill a need. As the adage says, the greater the risk the
greater the reward. But before someone turns to seller financed mortgage notes, it's best to consider the advantages of seller financing
as well as the disadvantages of owner financing.
In summary, a mortgage note consists of a promissory note and mortgage, both legal documents. Together these two documents are the "playbook" of a loan
used to purchase real estate. Mortgage notes are created by both financial institutions and private parties alike. Mortgage notes can be bought and sold
in the secondary market as investments.
If you are considering creating or selling a mortgage note and would like to know its value, please contact us for a free no obligation price quote.
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