What Is a Mortgage Note—and Do You Know Where Yours Is?

What is a mortgage note? Also known as a promissory note or deed of trust note, it’s the basic loan contract given to you by your lender—the document you signed on the dotted line to make your deal official.

A mortgage note is an important piece of paperwork to keep in your files for a variety of reasons. Here’s a rundown of what’s on this document, and why it matters.

What is a mortgage note?

Your mortgage note lays out all the specifics of your loan, including the following:

  • Rate of interest
  • Terms of your loan (e.g., 30-year fixed or five-year ARM)
  • Payment due dates
  • Penalties and fees for not meeting your payment due dates or other terms of your loan

Your mortgage note is also a contract pledging your property as security for the money you’re borrowing. It gives the lender the right to repossess the property if you don’t keep your end of the bargain by making payments promptly and regularly, as spelled out in the contract.

As you can see, your mortgage note is an essential contract and an important legal document, so if you’re buying a home for the first time, make sure you put your mortgage note in a safe place where you know you’ll be able to find it.

It would be a good idea to have a digital copy of it as well, in case your home is destroyed by flood or fire. However, if disaster strikes and you’re unprepared, know that your lender has a copy as well.

Mortgage notes and owner financing

Banks and other lending institutions are not the only ones to issue mortgage notes. In fact, “Mortgage notes are often associated with sales of property using owner financing,” says Alan Noblitt, owner of Seascape Capital, based in San Diego.

With owner financing, the homeowner not only sells the home, but also loans the buyer the money to make it possible.

“Oftentimes, owner financing can be a form of financing for buyers who experience difficulties obtaining a traditional mortgage loan through a bank,” Noblitt explains.

The buyer then pays this loan back monthly, plus interest, much like a conventional loan. This type of financing, however, typically lasts only a few years—at which point the buyer tries to refinance and apply for a conventional loan from a regular bank.

Can mortgage notes be transferred or sold?

Just so you aren’t surprised later on, here’s a fun fact: Your lender can sell your mortgage note without your permission. This happens more often than you might think, and it can happen more than once during the life of your loan.

Banks often bundle mortgages together and sell them to investment companies, and the transactions get really complicated. The important thing to know is that the terms of your mortgage note do not change with each new owner, who is required by law to see that the terms remain the same.

So when you get that notice in the mail saying that you’re now making payments to Bank XYZ, instead of to Bank ABC, whom you’ve been paying all along, don’t sweat it. The only thing that will change is the address where you’re sending your payments.

Mortgage notes as investments

Another fun fact: You can buy other people’s mortgage notes. Mortgage notes can be good investments for those who want to get involved with real estate, but are not interested in “the three T’s of landlording: tenants, toilets, and trash,” according to real estate investment expert Joel Cone.

Mortgage notes can be purchased through mortgage note brokerages (you can find hundreds online). They can also be purchased in shares of mortgage bundles through real estate investment trusts or other similar products. This is a fairly complicated venture, however, so you’ll want to do lots of research before you jump in.

Article by Lisa Johnson Mandell