What is a promissory note?

How is a promissory note and a mortgage note different?

Mortgage notes are a kind of promissory note. A promissory note is a legal promise that a borrower makes to a lender saying they will give back their money in full. A mortgage note is a document that is specifically related to buying a house. The note will contain information like the principal amount, the down payment, and the fixed or adjustable interest rate. It essentially lays out the terms of the loan and repayment.

What are the different kinds of promissory notes?

Promissory notes come in different forms. These include unsecured, secured, and the Master Promissory Note (MPN).

• An unsecured promissory note involves no collateral. However, the borrower must still repay the loan on time. If they cannot pay back the full amount, the lender is allowed to sue the borrower. They can also notify a debt collector who will pursue the unpaid amount.
• A secured promissory note requires collateral. This means the borrower must offer some kind of property, be it their house, car, or rental property, as an assurance. If the borrower cannot pay back their loan, the lender is entitled to seize this property.
• A Master Promissory Note makes a borrower agree to repay the loan in full, as well as interest. Why is it called “master”? Borrowers and lenders can use this kind of promissory note for multiple loans. A master promissory note is common with student loans. Let’s consider Katie, a college student. Katie takes out a Master Promissory Note in her first year of school and uses it to pay for all her school loans over four years. This is handy for Katie, who does not need to take out a new promissory note each time she needs a school loan.

Real estate is not as flexible. Every new home loan requires a secured or unsecured promissory note. Let’s say you have refinanced a house. In this case, you would sign a new promissory note since a refinanced loan qualifies as a new loan.

What information is in a promissory note?

As a legal document, a promissory note contains relevant information related to the terms of the loan. Every state has its own rules regarding what should be included in the note. However, there are some typical items that you will see in a promissory note:

• The name and contact information of the borrower.
• The details and contact information of the lender.
• The total amount being borrowed.
• The interest rate and how it was calculated.
• The date of the first payment.
• The payment amount.
• The number of necessary payments.
• How often the payments will be made.
• Repayment options and terms.
• Conditions of the loan.
• Charges and fees.
• Collateral (if required).
• Location and date of the note being issued.
• Maturity date of the loan.
• The signature of the borrower.

Usually, a promissory note will not specify how late payments or loan breaches will be handled.

How are real estate promissory notes different?

When you close on a home, you will usually have to sign a stack of paperwork. One of the documents you are signing is a promissory note. This is a standard part of the mortgage process. A promissory note in this context makes the purchased home collateral. This means if the homeowner cannot pay back their loan, the lender can seize the property and sell it.

When you close on a home, you will get a copy of the promissory note. The lender will keep the original until the loan has been repaid in full.

You may sometimes see a promissory note referred to as an eNote. This refers to a digital promissory note, common with online mortgage lenders like Rocket Mortgage.

How are promissory notes useful?

The point of a promissory note is to give the lender legal options if the loan is not repaid. This way they are not just out of luck if the borrower does not pay back the loan. If the homeowner defaults, the lender can sell the home. Once the mortgage has been repaid, the promissory note is no longer needed.

FAQs

What situations are promissory notes used in?

Promissory notes may be used for car loans, personal loans, student loans, and mortgages.

Can you write a promissory note?

Writing your own promissory note can help personalize a transaction. While there are templates online, it is best to contact an attorney to help ensure the contract is legally sound.

Is a mortgage necessary for a promissory note?

You don’t need a mortgage for a promissory note. If you are unable to get traditional financing to purchase a house, you can use a promissory note as a way to get a loan.