What is a mortgage note?

Whether you’re a homeowner or an investor, if you plan to buy a property and will need a loan, it’s important that you understand what is a mortgage note. A mortgage note is a set of documents used in a real estate transaction to secure a borrower and lender’s interest while defining the rules, responsibilities, and the repayment of each party. A mortgage note is often lumped together as if it’s one document, but in reality, a note and mortgage are two separate documents that have two different jobs.

What is a note?

A note is a promise to repay a debt and can be seen in many forms beyond a mortgage. Also referred to as a promissory note, a note’s job is to outline how much is being borrowed, the schedule for repayment, the cost for borrowing, and the borrower’s responsibility to repay the debt

A borrower will sign the note, which states the agree to the terms of the loan and promise to repay the loan according to the terms of the note. Notes are used when you get a loan for a car, take out a student loan, or business loan.

Promissory notes are not recorded in public records, and should be held by the lender who issued the mortgage note, or the person that owns the mortgage note currently.

What is a mortgage?

A mortgage, or deed of trust in some states, is the security instrument that protects the lender in the event the borrower does not repay their debt as outlined in the note. While it’d be great if everyone repaid debts as promised, sometimes they don’t. The mortgage is how the lender can recoup the money that is owed to them through legal action, such as foreclosure. A mortgage doesn’t exist solely to protect the lender. It also provides certain protections to the borrower while outlining the rights and responsibilities of both parties.

A mortgage is recorded in public records placing a lien against the properties title until its repaid in full. Once paid in full or satisfied, the lender should record a satisfaction of mortgage which releases the lien agains the property.

How are mortgage notes used?

When a loan is originated, the borrower will sign both the note and mortgage separately. The lender will provide a copy of both to the borrower, keeping the originals. The borrower will make their monthly mortgage payments as agreed in the note. If for some reason the borrower stops paying or defaults on the note, the lender can exercise their rights in the mortgage to foreclosure.

In the financial world, mortgage notes are created then sold as a package to other financial institutions and investors on the secondary market. It’s fairly common to have a different bank, credit union, or lender throughout the life of your mortgage, as mortgage notes are often sold many times. Note buyers, or note investors purchase the packages of loans or individual mortgage notes as an investment, earning interest on the debt that is owed. While most of this trading is done on a big scale at a big level (think bank to bank or financial institution to financial institution), there are companies called hedge funds and smaller investors like ourselves who are able to earn a living creating, buying, and selling mortgage notes.

Want to learn more about note investing?

Even as the economy heads into rough waters, note investors are positioned to do very well during these uncertain economic times.

If you're interested in learning how we are able to invest and profit by creating, buying, and selling mortgage notes regardless of the economic climate, visit our website, where we show you how you can become a note investor through our online note investing education program, Note Investing Academy.