Whether commercial or residential, unless you are paying cash when you purchase a piece of property, you will likely take out a mortgage. This is a loan from your chosen lender that is secured by the real estate you are investing in.
At your closing, the document you sign agreeing to these terms is referred to as the mortgage note. What is a mortgage note? Let’s take a closer look at what it is.
What is a Mortgage Note?
Applying for a mortgage involves a lot of research – known as underwriting. This is when the lender will take a very close look at your financial situation, the amount of the loan you are seeking, the value of the real estate, and so forth.
The bank is taking a risk when they agree to loan you money, so in order to protect themselves, they want to make sure that they are covered in case you don’t follow through with your end of the deal. For instance, if you do not make your monthly mortgage payments, they will use your new home as security so that, one way or another, they will get their money back for the loan they gave you.
The mortgage note will provide all of the details of the mortgage, including how you will repay the loan – as well as what will happen if you don’t.
At your closing, this document will be presented to you. It will appear as a formal legal document, detailing everything we just discussed above. More specifically, you can expect to see:
- The full amount of the loan you are receiving.
- The amount of down payment you have provided.
- The details about your payments, whether monthly, bimonthly, etc.
- Information about the interest rate, whether fixed or adjustable, etc.
- If there are any penalties for prepayment
As the signing agent provides you with the document, he or she will likely state that it is the mortgage note. And, if not, you can always ask. Keep in mind, they will not be able to provide you with specific details or answer specific questions as that will need to go through your loan officer. However, they can let you know the title of the document.
A Mortgage Note vs. A Mortgage Promissory Note
A mortgage note and a mortgage promissory note are not the same things. Though, they do go together when signing your loan documents.
The promissory note provides more detailed financial information regarding the loan and its repayment – all the way down to the methods of payment. This legal document will also specify what will happen if you do not repay the loan according to its terms.
The Importance of an Accurate Mortgage Note
As you can tell, these formal documents contain some very vital information pertaining to your loan agreement. Therefore, as you go through the closing, it is very important to make sure you understand what it is you are signing.
By the time you reach the closing, you have hopefully already reviewed the details of the loan and discussed any questions or concerns with your loan officer. As you go through your signing, you simply want to make sure that the terms listed on the note are the same as what you discussed with the lender.
Mistakes have been known to happen, as well as confusion between parties. Never sign a document if it doesn’t expressly state what it should – and never assume you can fix it later. It is true that questioning an incorrect document could delay your closing, but it is much safer to make sure that all documents are correct before you sign.
Just as these documents you are signing are there to protect the lender, they protect you, too.
Who Holds the Original Mortgage Note?
What happens to the original mortgage note after you sign at closing? Where does it go?
Your lender will hold the original mortgage note until it is paid in full and satisfied. However, because it is a security instrument, it can be sold to another party. It is not uncommon for real estate investors to purchase these notes and receive income from them. Because the underwriter did all the work, they are essentially low-risk.
It is important for you to know that it does not matter who holds the original mortgage note as you are still obligated to continue paying according to the terms listed on it.
Once you pay the mortgage in full, the note is turned over to you. This satisfies that mortgage and will reflect that you are the owner of the property and the lender no longer has a vested interest.
Defaulting on a Mortgage
We have discussed that the mortgage note and promissory note will address defaulting on the loan. And you know that your property is used as collateral to secure the loan. But what happens if you cannot make your monthly payments?
Not paying according to the terms of the loan puts you into default. Unless otherwise stated, this will give the lender the opportunity to initiate the foreclosure process. Only the party holding the mortgage note can move forward with the foreclosure.
Why Prepayment Matters
Your loan terms will state whether there is a penalty for prepayment. In most circumstances, prepayment is a good thing because the person who loaned the money gets their money back faster. However, in the mortgage world, prepayment means losing out on the interest.
Just as it saves you money to pay early and avoid interest, it costs the bank money because they won’t get back as much as they expected.
Before taking this step, carefully read through your documents to make sure that it makes sense to do so.
Agreeing To Mortgage Terms
Now that you know about mortgage notes and what to expect, you are better prepared when you decide to invest in your new property.
The first step is to get pre-approved for a mortgage with terms that you can feel good about.
To give yourself the best opportunity, contact Ahmad Azizi at Option Funding, Inc. to discuss your mortgage options and, of course, get answers to any questions you may have along the way.