While most people who set out to purchase a home never think about mortgage notes and what they mean to the entire process, these notes are exceedingly important and will tell you everything you need to know about your mortgage loan and how it needs to be repaid. No matter what stage of the home-buying process you're currently in, knowing about mortgage notes is important if you want to understand the necessity of this documentation and why you should always have it nearby.
What Is a Mortgage Note?
Mortgages are essentially contracts that are made between a borrower and a lender. The unique aspect of this contract is that the loan you receive is secured by the home that you're purchasing. If ever you default on your payments, your home could be seized as collateral by your lender. Among the most important documents that you must sign while purchasing a home is a mortgage note, which you will be tasked with signing on the closing date.
Mortgage notes contain every detail about the agreement that was made between the lender and borrower. It also accurately displays the terms of your mortgage, which can include information about how you're supposed to repay your loan. It's essential that you take your time to read through the mortgage note to make sure that everything's written properly and fully understood.
What's Included in a Mortgage Note?
Every term that's included in the mortgage loan between the lender and borrower is listed in the mortgage note. Mortgage notes usually specify:
- How much the mortgage loan is worth
- What the exact down payment amount is
- If a prepayment penalty exists
- If the mortgage is an adjustable-rate or fixed-rate mortgage
- If bi-monthly or monthly payments are needed
- What occurs if payments are no longer given on time
- The names of the borrower and lender
Keep in mind that this note provides your lender with control over your property until you repay the entirety of the loan. All mortgage notes also come with a promissory note, which is equally important and should be fully understood before you apply for a mortgage.
The exact details of your mortgage note largely depend on the type of mortgage you obtain, which can include a secured loan, a private loan, or an institutional loan. A secured loan involves using assets as a form of collateral. Since the property is used as collateral, your interest rate could be relatively low. You'll also find that the payment term is longer. Because the loan is secured with the property, the lender doesn't need to take on as much risk as they otherwise would have.
The second type of mortgage loan is a private loan, which occurs in the event that the lender has full ownership of the property. In this situation, the lender doesn't need to adhere to as many regulations, which means that the mortgage note can take practically any form that they want it to. As for institutional loans, these loans are provided from a bank or traditional mortgage lender. The loans are highly regulated, which means that the loan must match standard interest rates as well as payment terms. The most common payment terms for these loans include 15 years and 30 years.
What Is a Promissory Note
As mentioned previously, mortgage notes always include promissory notes, which effectively outline the exact terms you'll need to adhere to when repaying the loan. You'll find all of the financial details about repaying the loan on this note, which can include everything from the method of payment to the interest rate. Make sure that you look for the details about what happens if you don't repay the loan on time or if payments are missed.
What's Included in a Promissory Note
The many details that are usually included in a promissory note extend to:
- The location and date of the note issuance
- The amount of money that you're borrowing
- How much you need to pay each month
- The specific interest rate that you're set to receive
- The collateral that will be put up for the loan, which is the home itself
- How often you need to make payments
- The total number of payments that must be made until the loan is repaid in full
How Does Buying and Selling Mortgage Notes Work?
It's possible for an institution or private lender to sell mortgage notes if they no longer want to manage the mortgage. However, the borrower must be notified that the mortgage note could be sold when they first apply for the loan. A buyer may decide to purchase a mortgage note when the seller doesn't want to continue waiting for payments and would like to instead receive a lump sum of money at once.
When this type of transaction occurs, the initial lender is stating that they no longer have claim to borrower obligations. For you, however, there isn't much change. The only notable change that occurs when someone else purchases your mortgage note is that you will be required to send your monthly mortgage payments to another person or institution.
It's common for private mortgage lenders to sell their notes to other investors or institutions. In fact, there are many reasons why these sales occur, the primary of which include:
- The need to pay off debt
- The desire to obtain a sizable lump sum of cash
- Paying for college tuition
- Purchasing a home
- Paying for medical bills
- Moving money from one investment to another
- Putting money towards retirement
It's important to understand that no restrictions have been put in place to dictate how someone can spend the money they earn from selling a mortgage note, which is why this process is common. The main reason that potential buyers are oftentimes eager to complete this type of real estate transaction is because doing so comes with minimal risk. Since all mortgages are secured with the home itself, a buyer can purchase a mortgage note without adding a considerable amount of risk to their investment portfolio.
How Loan Repayment Works
A mortgage note is a type of document that's created when an agreement is made between a borrower and a lender. This agreement states that the loan must be repaid in full by a set date. In the event that a borrower is unable to pay their loan, it's possible for the loan to go into default, which can occur after a single missed payment or several months after the payments have stopped. The specific timeline depends on state laws as well as the terms that were detailed in your mortgage note.
While some homeowners default because they are unable to make the necessary payments on time, it's also possible to default because you simply forgot that you owed money. When a mortgage goes into default, the consequences can be severe. However, the exact consequences depend on the loan type as well as the lender. For a mortgage, your lender may demand that the entire remaining balance is repaid. In the event that you're unable to repay this money, the lender may begin foreclosure proceedings.
In some situations, federal law dictates that foreclosure shouldn't begin until the borrower is at least 120 days delinquent on the loan. This period of time is designed to provide you with the opportunity to repay what you owe, which would allow the loan to be taken out of default. Keep in mind that there may be overdue fees attached to the money you owe after missing a payment. Certain states limit the number of times that a default can be corrected. Along with missing your standard mortgage payments, your mortgage could also go into default in the event that:
- The condition of the property deteriorates to the point that the value is negatively affected
- You forget to pay your property taxes
- You don't make your monthly insurance premiums
- You go forward with transferring the property's deed without first obtaining the lender's permission
There are also several things that occur when the borrower pays off the entire loan. First, your lender should cancel the mortgage note and return it to you, which is meant to show that the terms of your loan have been fulfilled. You might also obtain the trust deed that has been canceled. Keep in mind that not every lender is the same. Some lenders won't provide you with any documentation. If this occurs, you should request documentation for your records.
The city or county recorder should also be notified by the lender that the mortgage lien that existed on the property has been canceled. Request this documentation as well. Once your loan has been paid off, call your homeowners insurance provider to make sure that your lender is removed from the policy. If you forget to take this step, the process that occurs when filing an insurance claim may become complicated. Keep in mind that any escrow account that existed for your insurance and tax payments will be closed when the loan is paid in full, which means that you must start making these payments on your own.
Mortgage notes are key financial documents that include practically every detail about the agreement that was made between you and your lender. If ever you lose this documentation, you should be able to obtain a copy from your lender.