A mortgage note is a written promise to repay a loan that is secured by real estate. The note sets out the debt and the payments, and a separate document, the mortgage or deed of trust, gives the lender a claim on the property if the payments stop. Whoever holds the note is owed the money.
People use the phrase loosely. A bank calls it a loan, a seller who carried financing calls it “the note”, and an investor calls it paper. They all mean the same pair of documents: a promise to pay, and a lien on property that backs the promise.
Two documents, two jobs
Most of the confusion around mortgage notes comes from treating one document as if it were two, or two as if they were one. They do different work.
| Document | What it does | Where it lives |
|---|---|---|
| Promissory note | The borrower’s promise to pay: the amount, the interest rate, the payment, the due dates and what happens on default | The original is kept by the holder and is not usually recorded |
| Mortgage or deed of trust | The security instrument: it pledges the property as collateral for the note | Recorded with the county, so anyone searching title can see it |
The promissory note is the debt itself. The mortgage, or in many states a deed of trust, is what makes the debt secured. The two are different mainly in how a default is enforced, which you can read about in a mortgage and a deed of trust compared. Recording the security instrument is what gives the public notice of the lien and fixes its place in line behind or ahead of other liens.
A note without a security instrument is an unsecured promise. A security instrument without a note secures nothing. Together they make a mortgage note.
Who the parties are
- The borrower, also called the payer, maker or mortgagor. This is the person who owes the money and owns the property.
- The lender, also called the payee, mortgagee or, under a deed of trust, the beneficiary. This is the person or company the note is payable to.
- The note holder. The lender to begin with, and whoever the note is later sold or assigned to. The holder collects the payments and has the right to enforce the note.
- A servicer, sometimes. A company the holder pays to collect payments, keep the ledger and send statements. Many private holders collect on their own.
What is written in a mortgage note
A typical note states:
- The original amount borrowed, called the principal
- The interest rate, and whether it is fixed or can change
- The monthly payment and the date it is due each month
- The term, meaning how many payments are left before it is paid in full
- Any balloon payment, a lump sum of the remaining balance due on a set date
- The grace period and any late charge
- What counts as a default and what the holder may do about it, such as calling the whole balance due
- Whether the borrower can pay early, and on what terms
The security instrument adds the borrower’s duties toward the property: pay the property taxes, keep it insured, keep it in repair, and often not sell it without paying off the loan. That last term is the due-on-sale clause.
Bank notes and private notes
Most mortgage notes in the US are made by banks and mortgage companies, then bundled and traded in large pools. A homeowner with a bank loan has a mortgage note, but rarely thinks of it that way.
Private mortgage notes are the ones individuals hold. The most common source is seller financing: an owner sells a house or land, takes a down payment, and lets the buyer pay the rest over time. The seller becomes the lender and holds the note. Private notes also come from loans between family members, from investors who lend against property, and from notes bought on the secondary market.
A related arrangement, the land contract or contract for deed, does the same economic job but works differently: the seller keeps legal title until the buyer pays in full, and there is no separate mortgage. Buyers price land contracts with that difference in mind.
A worked example
Illustrative example. The figures on your own note will differ.
A retired owner sells a house for $200,000. The buyer pays $20,000 down and signs a note for $180,000 at 7% interest over 25 years, secured by a deed of trust recorded with the county. The payment is about $1,272 a month.
| At closing | After 5 years | |
|---|---|---|
| Balance owed | $180,000 | about $164,000 |
| Payments left | 300 | 240 |
| Monthly payment | about $1,272 | about $1,272 |
In the early years most of each payment is interest, so the balance falls slowly. The schedule that shows how each payment splits between interest and principal is an amortization schedule. The owner now holds an asset that pays about $1,272 a month for 20 more years, backed by a house the borrower has paid into for five.
Why a mortgage note can be sold
A note is property. The holder can sell it, give it away, leave it in a will or sell only part of the payments. The buyer of the note steps into the holder’s shoes: the borrower keeps the same rate, payment and term, and simply pays someone else. The sale is carried out by endorsing the note to the buyer and recording an assignment of the mortgage or deed of trust.
Notes trade on what is called the secondary market for private notes, a loose network of private investors, funds and brokers rather than an exchange. A buyer pays a lump sum today for the payments still to come, and the price is almost always below the balance owed. That gap is the discount, and its size depends on the interest rate, the time left, the payment record, the borrower’s equity in the property and the paperwork.
In the example above, a buyer who needs a higher return than the note’s 7% would pay less than the $164,000 balance. How much less is the subject of how much your mortgage note is worth.
What makes one mortgage note better than another
Two notes with the same balance can be worth very different amounts to a buyer. The main differences:
- Lien position. A first lien is paid first if the property is sold in foreclosure. A second lien stands behind it and carries more risk.
- Equity. The more the property is worth compared with the balance, the safer the note. A large down payment helps.
- Seasoning. A long record of on-time payments is the best evidence that payments will keep coming.
- The paperwork. An original signed note, a recorded security instrument and a clear payment ledger make a buyer comfortable. Missing pieces lower the price or stop a sale.
- The terms. Rate, payment and remaining term decide what the payment stream is worth before risk is even considered.
Keeping it is a choice too
Holding a mortgage note means a steady income and, if the borrower pays to the end, more total money than any sale would bring. It also means collecting, chasing late payments, checking taxes and insurance, and carrying the risk of a default. Some holders keep their notes for life. Others sell all or part when they need the money or want the risk gone. If you want to see what yours would bring before deciding anything, send us the details and we will show you the figures and how they were reached. A quote is free and you are under no obligation to sell.
Related questions
Is a mortgage note the same as a mortgage?
Not quite. The note is the promise to pay. The mortgage, or deed of trust, is the separate document that pledges the property as security for that promise. People often use the words as if they were one, but a sale or a foreclosure needs both.
Who holds the original mortgage note?
The lender holds it at first, and then whoever the note is sold or assigned to. In seller financing, the seller who carried the loan usually keeps the original signed note, while the security instrument is recorded with the county.
Can I sell a mortgage note I hold?
Yes. A note can be sold in whole or in part. The buyer pays a lump sum, usually below the balance, and the borrower keeps paying on the same terms, only to the new holder.
Is a land contract a mortgage note?
It does the same economic job but is structured differently. The seller keeps legal title until the buyer pays in full, and there is no separate mortgage. Buyers price the two with that difference in mind.