What is a mortgage note?

When most people buy a house, they use a mortgage, or home loan. When you get to the closing table, you’ll sign a mortgage note that dictates the terms of agreement between the borrower and the lender, including what happens if you fail to meet the terms. Also known as a promissory note, this is the legally binding contract that compels you to repay your mortgage loan within an agreed period of time.

Why is a mortgage note important?

A mortgage note typically contains at least two distinct documents: the promissory note and the mortgage.

The promissory note is the legal document you sign agreeing to repay the mortgage. It includes details about your loan, like the amount you owe, the interest rate, the payment schedule, the duration of the loan, and more. It also lays out the consequences should you fail to meet the payment schedule or repay the loan on time. The U.S. Department of Housing and Urban Development offers an example of what a promissory note looks like.

The mortgage — also known as the deed of trust in some states — is the document that gives the lender the right to repossess the property if the terms of the promissory note are not met.

These two documents together make up what’s commonly called the mortgage note. While they contain similar information, the mortgage is more detailed about the legalities of ownership and other real estate particulars.

What goes into a mortgage note?

Every lender offers their own mortgage promissory notes, but generally they’ll contain most of the same information. The mortgage promissory note typically contains the following information:

• Total amount of the home loan
• Down payment amount
• Interest rate, including whether it’s a fixed or adjustable rate
• Payment schedule (monthly or bimonthly)
• Whether or not there’s a prepayment penalty
• Consequences of late payments or failure to repay

The mortgage document, or security instrument, may repeat some information and will detail your responsibilities and rights as a borrower and homeowner. This is also the document that lets you offer the property as collateral for the loan and gives the lender the power to repossess the property. Unlike a title, which designates ownership of the property, the mortgage note simply lays out the particulars of the relationship between the borrower and lender as far as the loan is concerned.

Who holds the mortgage note?

When you sign the mortgage note at closing, you’ll receive a copy of the mortgage note prepared by your lender. Your mortgage lender or servicer holds the mortgage note until they sell it on the secondary market. Most lenders do this quickly after closing because mortgage notes are often pooled in mortgage-backed securities bought and sold by investors. Your mortgage note might change hands several times before you pay off the loan, but it won’t impact your rights, your monthly payment, or your obligations to honor the terms of the loan.

If you ever misplace your copy of the mortgage note, you can request a new copy from your mortgage lender or servicer. They’ll have a record of the note. Alternatively, you can also reach out to your county’s recorder of deeds.

What happens to your mortgage note if you default on your loan?

As we’ve alluded to throughout this piece, if a borrower fails to make payments on their mortgage, the mortgage note gives the lender the right to start foreclosure proceedings. Whoever holds the mortgage note (which might not always hold the mortgage note at the time of foreclosure) must produce the note to begin these proceedings.

First, you’ll get a notice of default. Mortgage lenders want to get their money back on a mortgage so don’t feel like this notice is catastrophic. You can contact your lender to negotiate a repayment plan like a forbearance or a modification. This may help you avoid ultimate foreclosure. Until you’ve come up with an agreed-upon plan, however, the foreclosure process continues. Foreclosure laws vary by state, so it can take a while for the lender to sell the home and force your eviction. Foreclosure can destroy your credit and financial situation, so you should exhaust all options before getting to that point.

The mortgage note combines a promissory note and the mortgage yourself. It’s vital to understand everything this note says because it lays out the terms and legal obligations of your loan.