Saturday, May 16, 2009

Note v. Mortgage: What's the Difference?

This may be old hat to some veterans out there, but it never hurts to cover the basics.

The terms loan, mortgage, deed of trust and note are sometimes used interchangeably by parties to a real estate transaction. Only when you get to settlement (when you see the huge stack of papers on the closing table) do you realize there is a difference. So let’s cover the note, the mortgage/deed of trust, and the differences between them.

The Note

A note (or promissory note) is – very simply – a contract whereby a party makes a promise to pay a sum of money to another party under specific terms. In real estate, it is typically a borrower agreeing to make monthly payments of principal and interest over 30 years to a lender. The note has virtually nothing to do with the property itself, and can technically exist without any collateral at all. If the borrower doesn’t pay, the lender can sue “under the note” and obtain remedies for breaching that contract.

The Mortgage or Deed of Trust

While there are differences between a mortgage and a deed of trust, let’s ignore them for a moment, and use the term mortgage (because it’s only 1 word). If it's killing you to know the difference, click here.

A mortgage is actually a transfer of an interest in property. While a mortgage is tied to the underlying debt created by the note, it is not a promise to pay the debt. It really isn’t a “promise” to do anything. Instead, it contains “granting” language – like a deed – which gives the lender the right to take the property if the borrower goes into default and doesn't pay under the terms of the note.

Key Differences

- A note is signed by the people who agree to pay the debt. A mortgage is signed by those who own the property being mortgaged. In a typical residential setting, signers of the note and the mortgage are the same, but they do not have to be. In a commercial context, you will often see the corporate entity which holds the property sign the mortgage, while the principals of the entity sign the note.

- A mortgage needs to be recorded in the county or town recording office, the note does not. Instead, the note goes directly to the lender.

- A mortgage kills more trees than a note (approximately 35 pages v. 6). But don't hold that against the mortgage, it doesn't know any better.