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What Is A Mortgage Note And Why Is It Important?

Ashley Kilroy4-minute read

June 03, 2022

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A mortgage is a type of contract. What makes it special is that it’s a loan secured by real estate. A mortgage note is the document that you sign at the end of your home closing. It should accurately reflect all the terms of the agreement between the borrower and the lender or be corrected immediately if it doesn’t.

Read on for more information on what a mortgage note is and how your repayment plan affects who owns it.

What Is A Mortgage Note?

When you apply for a mortgage, both you and the house you want to buy must go through the underwriting process. Your prospective lender will consider whether you’re creditworthy, and whether the home you’d like to purchase has value sufficient to secure the loan should you default.

A mortgage note provides a description of the mortgage. It’s the document that states how you’ll repay your loan, and it uses your home as collateral.

What Does A Mortgage Note Look Like?

A mortgage note is a legal document that sets out all the terms of the mortgage between a borrower and their lending institution. It includes terms such as:

  • The total amount of the home loan
  • The down payment amount
  • Whether monthly or bimonthly payments are required
  • Whether the mortgage is fixed or adjustable interest rate
  • If there is a prepayment penalty

It can be helpful to look at a mortgage note example like the one available on the Department of Housing and Urban Development (HUD).

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What Is A Mortgage Promissory Note?

The mortgage note is often accompanied by a promissory note. A promissory note essentially outlines the terms to pay back the lending institution.

A promissory note provides the financial details of the loan’s repayment, such as the interest rate and method of payment. A mortgage specifies the procedure that will be followed if the borrower doesn't repay the loan. If you live in a deed of trust state, you will not get a mortgage note.

Therefore, it’s essential to ensure that your mortgage note and all other legal documents involved in your home buying process are completely accurate. When you get a mortgage, you and a lawyer should read through the mortgage note to make sure the terms are 100% accurate and that all agreements are included. You want this document to protect you as much as it protects your lending institution.

Who Holds The Original Mortgage Note?

Because a mortgage note is a security instrument, it can be bought and sold on the secondary mortgage market. Therefore, mortgage lenders sometimes sell mortgage notes to real estate investors who are attracted to these relatively risk-free investments and the potential to earn passive income.

Because lending institutions sell mortgage notes, real estate investors technically own a mortgaged property. These investments are low-risk, because the only way investors will lose money is if a borrower defaults on their loan or avoids paying interest by prepaying their mortgage. Even in the latter situation they may not lose money – but also wouldn’t make much money because they wouldn’t be earning interest.

Regardless of who holds the mortgage note, the borrower is obligated to follow the terms of the mortgage. The borrower won’t be affected by any change in who holds the note because the payments will consistently be made to a third-party entity throughout the life of their loan.

The borrower won’t have the original copy of their mortgage note until they’ve paid off their loan. At closing, the borrower will receive a copy of the mortgage note.

This is part of the legal process and helps the borrower to understand what their responsibility is in paying back a loan. Once they’ve paid off the entirety of the loan, they’ll receive the deed to their home.

What If The Borrower Defaults?

Real estate investors want people to pay off their mortgages in the time allotted because it yields the highest return on their investment. Therefore, they don’t want borrowers to default on their loan or pay off the loan before the end of the term.

If a buyer defaults on a loan or fails to adhere to the terms of the mortgage, the real estate investor can begin the foreclosure process. In most states, when a real estate investor starts the foreclosure process, it’s called a judicial foreclosure.

The party pursuing the foreclosure must produce the note to prevail. In deed of trust states, a trustee becomes legal owner of the property, and the trustee brings a nonjudicial foreclosure in case of default.

What If The Borrower Prepays?

If a borrower makes early payments in addition to their monthly payments, they may have to pay penalties. These penalties can vary among states. People choose to prepay so that they can pay off their mortgage early or make lower interest payments.

Be sure to investigate your state and local laws to understand if there are laws prohibiting loan prepayment penalties. It may not make financial sense to make early payments or prepay your mortgage.

What If The Borrower Pays Off The Mortgage In Full?

When a borrower pays off a mortgage, the note holder gives the note to the borrower. This means that the home is theirs, free and clear.

If a borrower refinances a mortgage, the new mortgage pays off the original lender and a new note is created, to be held by that lender until the new mortgage is paid in full. In the event of a refinance, the borrower will not have the note or deed to the home.

Instead, they’ll continue to make payments to a third party, and the lender can sell the mortgage note on a secondary market. In this event, real estate investors will still own the mortgage note until the borrower pays off their mortgage.

The Bottom Line

Your home is probably one of your most important assets, so be sure to take the time at closing to ensure that all legal documents related to your mortgage are accurate, including any interest rate changes or changes in who owns your mortgage note.

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Ashley Kilroy

Ashley Kilroy is an experienced financial writer. In addition to being a contributing writer at Rocket Homes, she writes for solo entrepreneurs as well as for Fortune 500 companies. Ashley is a finance graduate of the University of Cincinnati. When she isn’t helping people understand their finances, you may find Ashley cage diving with great whites or on safari in South Africa.