Mortgage Note: What It Is and How It Works

Matt Webber is an experienced personal finance writer, researcher, and editor. He has published widely on personal finance, marketing, and the impact of technology on contemporary arts and culture.

Doretha Clemons, Ph.D., MBA, PMP, has been a corporate IT executive and professor for 34 years. She is an adjunct professor at Connecticut State Colleges & Universities, Maryville University, and Indiana Wesleyan University. She is a Real Estate Investor and principal at Bruised Reed Housing Real Estate Trust, and a State of Connecticut Home Improvement License holder.

What Is a Mortgage Note?

A mortgage note is a legal document for the loan contract between the lender and borrower when purchasing real estate. Once signed by both parties, this document is legally binding and includes details such as the loan terms, the monthly payment amount, the interest payment, and penalties incurred for late or missed payments.

Key Takeaways

• A mortgage note is a legal document signed when closing on a mortgage.
• The mortgage note contains details about a loan, including interest, monthly payments, and penalties for late payments.
• The mortgage note establishes the property as collateral for the loan.
  

Real Estate Closing

Near the end of the mortgage process, borrowers will be ready to close on a property and sign important documents. A title company or an attorney will commonly host the closing. At this meeting, borrowers sign a mortgage note, which generally holds two parts:

• A promissory note is a legal document representing the borrower's agreement to repay the loan. The note details the loan value, the interest rate charged by the lender, the due dates for payments, and the loan terms.
• The mortgage portion is the document that gives the mortgage provider the right to take the property if the borrower fails to pay the mortgage under the loan terms.

The U.S. Department of Housing and Urban Development (HUD) provides an example of a standard mortgage promissory note on its website.

Mortgage Note Details

Mortgage notes vary among lenders, but every mortgage note contains the same basic information. The promissory note portion includes:

• The dollar amount of the mortgage loan.
• The interest rate that borrowers will pay. If the rate is adjustable, the document will explain how and when the interest rate will be adjusted.
• The down payment amount.
• Whether monthly or bimonthly payments are required.
• Whether a prepayment penalty is imposed.
• The penalties for late payments.
  

A mortgage note may contain details such as an occupancy section stating that the borrower must occupy the property as a principal residence. There may also be a clause that states borrowers cannot store hazardous substances on the property.

Who Holds the Mortgage Note?

The mortgage note will be held by a mortgage provider.

What If a Borrower Defaults on a Mortgage?

If a borrower defaults on a mortgage, the lender can begin foreclosure proceedings. The party pursuing the foreclosure must produce the mortgage note. However, the Uniform Commercial Code (UCC), a set of business laws that regulate financial contracts employed across states, does allow for foreclosures in cases of lost notes.

How Do Borrowers Obtain a Copy of a Mortgage Note?

Borrowers receive a copy of the note when they close on the house or property. The note holder and the county recording office should also have copies.

The Bottom Line

A mortgage note is a legal document signed when closing a mortgage. It gives details of the amount of the loan and the terms of the agreement. A mortgage note also establishes the property as collateral for the loan. Before signing, borrowers should ensure that their mortgage note is correct and all terms agreed upon are recorded correctly.

1. Consumer Financial Protection Bureau. “Guide to Closing Forms,” Pages 1–2.
2. U.S. Department of Housing and Urban Development. “Adjustable Rate Note.”
3. Harvard University, Joseph William Singer. “Bank Has Standing to Foreclose Despite Inability to Produce the Note on Which the Mortgage Was Based.”

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Pre-foreclosure refers to the early stage of a property being repossessed due to the property owner’s mortgage default.

Up-front mortgage insurance (UFMI) is a type of mortgage insurance policy made at the time of the loan. It is required on certain FHA loans.

A silent second mortgage is a second mortgage placed on an asset for down payment funds that are not disclosed to the original mortgage lender.

The primary mortgage market is the market where borrowers can obtain a mortgage loan from a primary lender such as a bank or community bank.

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