The Note and Mortgage.
Mortgage and note documents are only applicable at a closing if a buyer is borrowing money to buy a property.
A real estate note is often mistakenly referred to as a mortgage. However, a note and mortgage are two separate documents.
The note is a written promise to pay back an amount loaned to purchase real estate. It is essentially an IOU. This document stipulates how the loan must be repaid, the amount of the payments, when the payments must be made, and the address to which they must be sent. The note also states the interest rate that will be charged and if that rate can vary, and if so, its allowed frequency and limits.
The note also states what action the lender can take if the payments are not made as agreed, as well as the penalties that can be imposed on the borrower.
A real estate note also defines when the lender can call the note due. For example, this can happen if the note has a due-on-sale clause. This means that if the borrower sells the property, then the loan must be fully paid at that time.
A mortgage is a completely different document and has a different purpose, which is to provide the lender with security against a borrower defaulting on the terms of the note.
When recorded at the county courthouse, a mortgage gives notice to the world that the real estate is encumbered and cannot be sold without first satisfying the underlying note.
A mortgage also gives a lender the right to foreclose on the property if the note is not paid in full, or if the taxes and hazard insurance is not paid.
Trust deed states use a different system to secure notes for lenders. Instead of receiving a mortgage, the property is deeded to the lender and held in trust by a third party until the loan is paid. If the loan is not paid, then the lender can claim the deed from the third party.
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Marius J Smook – Licensed Real Estate Eco-Broker, LEED AP for HOMES, Home Energy Rater.