What is a Note

What is a Mortgage Note?

A mortgage or promissory note is a written agreement between two parties which states that one party is liable to pay a specified amount to another party on a specified date, in a specified method or on any other terms agreed upon by the borrower and lender.

The Mortgage, Deed of Trust, or Contract for Deed evidences the fact that the lender has a lien on a property based on the loan he has made and has the right to collect payments in the amount of, and according to, the terms contained in the note. It further imposes a requirement on the borrower to repay the debt. A mortgage note describes in detail the penalties if the borrower fails to repay the loan according to the agreed upon terms.

In foreclosure proceedings, the court requires the lender to produce the Mortgage Note to prove the lenders ownership of the debt and terms under which the loan was made.

Types of Mortgage Notes

1. Fixed-Fixed-Rate Mortgage: The interest rate and monthly payment amount are fixed for the entire loan term.

2. Graduated Payment Mortgage Note: The initial interest rate is fixed for a period of usually several years and adjusts thereafter.

3. Adjustable-Rate Mortgage Note: The interest rate and monthly payment amount are based on a short-term index and fluctuate accordingly. Some indexes such as LIBOR are reset monthly, quarterly, or annually. These are also known as “ARMs.”

4. Balloon Payment Mortgage Note: The amortization schedule of the loan is beyond the final payment date. Thus, the remaining balance or a “Balloon” payment is required at the loans’ maturity date. An example of this type of loan has a 10-year term but amortizes over a 30-year period.

5. Interest-Only Mortgage Note: The loans principal is not amortized over the terms. The borrower only makes interest payments, and the principal is not amortized. The loans entire principal amount is paid at maturity.

6. Negative Amortization Mortgage Note: When the loan payment is less than the interest charged.  This creates deferred interest which is added to the principal balance of the loan.  In this case, the principal amount owed increases over the term costing the consumer more in the long run. 

Of all the types of loans discussed here, Fixed Rate notes make the safest investments. They avoid rate adjustments or demands for total repayment during the amortization period which increases the likelihood that the borrower will be unable to make his/her payments.  Adjustable Rate, Balloon Payment and Negative Amortizing loans that were irresponsibly originated in the early 2000’s were a large cause of the country’s last recession.

Lien Rights

Liens give a person or organization a right or claim to someone else’s property. For example, a mortgage lender files a lien against the property used to secure a mortgage when originating the loan. The lender, as a lienholder, can initiate legal foreclosure proceedings to recoup their costs if the borrower defaults on the loan. Federal or state liens, such as taxes, are paid before any lender debts are resolved. Liens are ranked by priority; first, second, third, etc. A loan’s priority is established by its recording time and date. The saying is “ first in time, first in right”, which means that the debtor with the earliest recorded loan is paid first.