How a mortgage note works

Quick insights

• A mortgage note is a legal document that lays out the terms of your home loan agreement.
• The note provides important details, such as the total loan amount, payment structure and whether any restrictions apply.
• Mortgage notes can be bought and sold on the secondary mortgage market, which impacts who “owns” your mortgage.

As you prepare to buy your first home, you’ve likely heard a lot of chatter about the amount of paperwork involved in securing a mortgage.

Among these is the mortgage note, one of the most important documents in the mix. But what is a mortgage note, and why does it matter?

What is a mortgage note?

A mortgage note, sometimes referred to as a house note, is a binding legal document that establishes the terms of your loan agreement with your lender. Signed at closing, it’s your written promise to repay your home loan under the specified terms, such as the interest rate, payment schedule and loan duration.

Who owns my mortgage note?

When you close on a mortgage, your lender holds onto the mortgage note as your loan’s security instrument. However, lenders often sell mortgage notes to institutions like Fannie Mae^® or Freddie Mac^®, which operate in what’s known as the secondary mortgage market.

Why does this matter? For you, as a borrower, it should have a minimal impact on your life. A transfer of your mortgage note doesn’t change your agreement. You’ll continue making your monthly payments as usual, regardless of who owns your mortgage note.

However, understanding how this system works can be helpful, as it will give insight into how the lending world operates behind the scenes. For example, why certain communication comes from companies you don’t recognize rather than the lender you worked with originally.

In addition, some real estate investors will choose to purchase mortgage notes as a way of earning returns, adding another layer of complexity to where these documents might end up. Again, this can happen periodically, and it’s nothing to stress about. Nevertheless, staying aware of these changes is wise.

Is a mortgage note a lien?

Though a common point of confusion for first-time homebuyers, a mortgage note isn’t the same thing as a lien. The lien is a legal claim your lender places on your property until you fully pay off the loan.

Essentially, a lien allows them to foreclose if you stop making your mortgage payments.

The mortgage note, however, is simply the document that outlines your agreement to repay the amount borrowed. It may be helpful to think of the mortgage note as the terms of the loan, while the lien is the lender’s safety net.

What is included in a mortgage note?

Your mortgage note contains important details about your loan and what’s expected from you and from the lender. You’ll typically find the following included in the note:

Total loan amount and interest rate

Perhaps most importantly, your mortgage note will specify exactly how much you have borrowed and whether the loan has a fixed or adjustable interest rate. Fixed rates stay the same throughout the life of your loan, while adjustable rates may fluctuate over time.

Payment schedule and structure

Your payment schedule outlines how much you need to pay each month, as well as whether those payments are due monthly or bi-weekly.

Loan term

This is the length of time you’ll be making payments, most commonly 15 or 30 years.

Prepayment penalties

Some lenders choose to include clauses detailing fees you’ll need to cover if you pay off the loan early. This could affect your decision if you plan to refinancerefinance-hl000061 or sell your home before the loan’s term ends.

Down payment amount

The amount you pay upfront when purchasing the home will also be included in the note.

Special clauses or conditions

These might include occupancy requirements, such as whether you’re required to live in the home as your principal/primary residence, or restrictions like not being allowed to store hazardous materials on the property.

How do I find my mortgage note?

The mortgage note will be handed to you at closing or included with the loan paperwork your lender provides you.

You might be wondering, “where can I find my mortgage note if I lost it?” If you can’t locate your mortgage note, don’t panic. Contact your lender or loan servicer. They’re typically responsible for keeping an additional copy on file and can provide you with one upon request. Just remember, you don’t technically “own” the note until you completely pay off your loan.

It’s also worth noting that if you live in a state that uses a deed of trust or “trust deed” (such as California or Texas), you won’t receive a mortgage note. Deed of trust states rely on different legal mechanisms, though they still achieve the same fundamental purpose of securing the lender’s interest in the property.

Difference between a mortgage note and a promissory note

You’ll often hear “mortgage note” and “promissory note” mentioned together, but they’re actually two distinct documents with different purposes.

The promissory note is your written agreement to repay the loan. It outlines the loan’s financial details, like the interest rate, repayment schedule and payment method.

The mortgage note, on the other hand, is the instrument that secures the loan with the property you’re purchasing. It specifies what happens if you fail to repay the loan. These two documents work hand in hand throughout the lifespan of your mortgage, but they are not the same.

What happens if your mortgage note is sold?

At some point, your mortgage note may be sold by your original lender to another financial institution. Again, this might sound alarming, but it’s a common practice in the mortgage industry and doesn’t affect the agreement or terms of your loan.

When this happens, the new institution will become the one you make payments to. You’ll receive a notification from both your current lender and the new one, letting you know where to direct your payments moving forward. The terms of your loan will remain the same, and you won’t receive a copy of the original note until you pay off the loan in full.

What happens to your mortgage note if you pay off your loan or refinance?

When you finally pay off your mortgage loan or refinance it, the mortgage note is considered fully satisfied. Once this happens, your lender will mark the loan as paid, and you’ll receive the original mortgage note stamped, “Paid in Full.”

If you choose to refinance, the original mortgage note is essentially replaced by a new one, but reflects the updated loan terms you’ve agreed to with your refinance lender. This resets the clock on your repayments, so be sure you’re keeping track of the new schedule.

If you fully pay off the loan, this can also be the moment when you receive the deed to your property outright, marking it as fully yours.

What happens to the mortgage note if you default on your mortgage?

Failing to make your loan payments can have serious consequences, including losing your home. If you default on your mortgage, the note allows the lender (or investor holding the note) to pursue the legal process of foreclosure.

Foreclosure enables the lender to take back ownership of the property and sell it to recover the money you still owe. This is referred to as a judicial foreclosure in most states, meaning the process must go through the court system. To successfully foreclose, the party initiating the process must present the mortgage note as proof of their right to collect on the loan.

If foreclosure becomes a real risk for you, get in touch with your lender as soon as possible. Many lenders offer programs or assistance to help borrowers get back on track with their payments and prevent foreclosure.

In summary

At first glance, much of the mortgage process can feel overly technical, and you might be tempted to skim over the fine print. Of course, reading through pages of legal jargon isn’t nearly as exciting as picking up the keys to your new house or picking out paint colors.

However, your mortgage note is worth the attention. It’s the key document protecting you and your lender, and it provides a great deal of clarity around the terms of your home loan. While it might seem intimidating at first, think of it as your comprehensive guide to understanding how your payments are structured and what’s expected throughout the lifespan of your loan.