What Is a Mortgage Note?
Buyers of homes usually need to deal with a mortgage note, though this document is little understood. Looking into the purpose and details of a mortgage note makes it easier to manage loans, benefit from lower risks, and discover possible investment chances, no matter if you are buying a home for the first time or reviewing your portfolio as an investor.
The guide explains what a mortgage note is, explains how it contrasts with something like a promissory note, and outlines the key points Canadian borrowers should understand about home financing.
What Does a Mortgage Note Mean in Real Estate?
A mortgage note is another name for a real estate lien note or borrower’s note, and it contains the terms for your mortgage loan. Canadians who take out a loan sign a note, promising to repay the lender, usually within an agreed period and at an interest rate. It covers every condition for repayment and is the main part of the mortgage agreement.
Be sure not to mix up the mortgage note with the mortgage deed, which is another document that secures the loan using the property. While the deed gives the lender permission to foreclose, the note is the borrower agreeing to make the payments.
What Is Included in a Typical Mortgage Note?
Here are the essential parts of a mortgage note:
- The amount you originally borrow from the lender is the loan amount.
- Interest Rate: Is the rate permanently set or set to change over time, and it determines the amount you will have to pay.
- A loan is usually given for a term of 15, 2, or 30 years.
- Customers can set up payments either monthly, biweekly, or with a more flexible schedule.
- Full names and addresses of both the borrower and the lender should be listed.
- Penalties: What could happen if payment is late or made early?
- Signatures act as a legally valid way for both integrating parties to show acceptance.
How Is a Mortgage Note Different from a Promissory Note?
People often use these terms interchangeably, but they do different things.
A promissory note is a general promise from the borrower to pay back a loan. It describes how and when you’ll repay the loan, without mentioning collateral. Alternatively, a mortgage note links to real property and usually names a mortgage deed or a similar security document.
| Feature | Promissory Note | Mortgage Note |
|---|---|---|
| Purpose | Promise to repay | Secured real estate collateral loan agreement |
| Includes collateral? | No | Yes (via mortgage deed) |
| Legal impact | Enforceable in civil court | Enforceable and used in foreclosure |
| Used in real estate? | Sometimes | Always in home financing |
Is a Promissory Note the Same as a Mortgage?
Not exactly. A promissory note forms a part of the loan agreement. If you take out a mortgage (or deed of trust in some areas, the loan is protected by the real property you use as collateral.
The promissory note is what proves you owe money, and the mortgage warns what could happen if that debt is not paid. Usually, at the closing, the homeowner receives and signs a mortgage note for the financial details and a mortgage deed to prove ownership of the home.
What Are the Different Types of Mortgage Notes?
The structure of interest and principal can change how a mortgage note is written.
- Fixed-rate notes have regular payments and a fixed interest rate until the end of the loan.
- With Variable or Adjustable-Rate Notes (ARMs), the interest rate varies depending on benchmark indexes.
- With Balloon Notes, borrowers pay moderately affordable rates and a big payment at the end.
During the beginning, the borrower is required to make interest payments only, but later they pay off the loan in segments, called amortization.
Hybrids are flexible enough for first-timers and those with experience, depending on what someone needs their loan to do for them.
Can You Sell or Buy a Mortgage Note in Canada?
Yes, the mortgage notes can be sold or purchased in the secondary market. This is common for institutional investors, private lenders, or mortgage-backed security funds.
The process normally involves legal due diligence to ensure the validity and enforceability of the note. The buyers of the note are assigned the payments under the loan and can foreclose in the event of default by the borrower. Note investing entails risks of default or defective documents.
What Is a Mortgage Note Fund?
The mortgage note funds invest, purchasing quantities of mortgage notes in bulk, often at a discount. The funds earn income for the investors through interest payments received from the borrowers.
Compared to direct property investment in mortgages or REITs , the mortgage note funds can provide better yields but may involve more complicated due diligence.
What’s an Example of a Real Mortgage Note?
Here is a sample with basic redaction:
"I, JOHN DOE, pledge to pay ABC LENDING INC., in the sum of $525,000, with interest at a rate of 4.8% annually, payable monthly starting from March 1, 2024, and for a term of 30 years."
They will also have borrower rights, prepayment, and amortization terms, as well as terms of enforcement.
Who Holds the Mortgage Note and What Happens If It’s Lost?
The originating lender normally holds the mortgage note for the duration of the loan or sells it. Canadian investors or financial institutions can also sell mortgage notes between themselves.
If the note is lost, the lender must file a legal affidavit and supporting documentation to compel repayment. The courts can still allow foreclosure if there is sufficient evidence of ownership.
What Happens to the Mortgage Note After the Loan Is Paid Off?
A mortgage note is the decisive evidence that is employed in foreclosure situations. Lenders are required to show that they own either the original or a legal copy of the note. Without such documentation, foreclosure can be denied by the courts.
The process ensures that only authentic lenders can pursue homeowners legally.
What Is the Role of a Mortgage Note in Foreclosure?
In foreclosure proceedings, the mortgage note is vital evidence. Lenders must prove they possess the original note or a legally transferred copy. Without this document, courts may deny the right to foreclose.
This process ensures that only legitimate lenders with standing can initiate legal action against homeowners.
“Learning about your mortgage note isn't only important legally - it also shows you your financial map. Borrowers and investors alike can benefit by using a mortgage agreement, which defines how lending, changes, and final results are handled.”
— Steven Tulman , President & Principal Broker, Clover Mortgage
Conclusion: Why Mortgage Notes Matter to Every Homeowner
Aside from being legal contracts, a mortgage note is also a contract you make with your lender. The conditions of the mortgage are clearly stated in the interest paid, the late fee, and all the other terms.
Learning about the structure, types, and legitimacy of a mortgage note simplifies things for borrowers to make the right decisions, avoid losses, and even partake in mortgage note investing in the future. Once you secure a mortgage, remember that the note is always there, even as you keep an eye on your investments.
Contact Clover Mortgage today to get tailored advice from our suite of mortgage professionals to navigate the nuances of the mortgage note in your mortgage and/or homeowning process.
FAQs
What is a note in a mortgage contract?
A mortgage note or promissory note is one signed by the borrower to bind repayment under terms agreed upon. Your mortgage will reflect the size of the loan, the interest rate you pay on it, and the payment plan.
How does a promissory note relate to mortgage loans?
The promissory note states what the borrower will do, while the mortgage makes that promise 'secure' through the borrower's home.
What does "mortgage note meaning" refer to in legal terms?
In legal terms, a mortgage note states that the person borrowing must repay the loan for their mortgage. It proves how much the borrower owes and can support legal action if payments are not made.
