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How are promissory notes different from mortgages?

When you get a loan in order to purchase a home, you have to sign both a promissory note and a mortgage.

What exactly is the difference?

Promissory notes

Essentially, the promissory note is your promise (hence its name) to pay back the amount you borrowed from the lender (usually a bank) in order to make the purchase. It's your "IOU," but it's also:

  1. Proof that you are the borrower
  2. A statement of what you are borrowing the money to purchase (the property's address)
  3. Proof of the amount of the loan
  4. The terms of the loan's repayment in years and at what interest rate
  5. An agreement to pay late fees or penalties

The promissory note is held by the lender so long as your loan remains in place. Once you pay the loan off, the promissory note is actually marked as paid and returned to you. (In days gone by, it used to be the custom to seal the paid off promissory note inside the landing newel of a home's staircase for prosperity and good luck!)

Mortgages

The mortgage, on the other hand, is what gets recorded with the county. It serves as a form of security and contains much the same information as the promissory note -- along with clauses that allow the bank to accelerate the loan for nonpayment if you default and, ultimately, foreclose. Once the loan is fully paid, the lender will file a record that the mortgage has been satisfied and release any claim on the property.

The mortgage basically functions as the fail-safe for the lender when things go wrong and a borrower defaults on the promissory note.

It's not unusual to be confused about these two documents since they're closely related and work together to protect the lender. It's very important to make certain that both the promissory note and mortgage are accurate -- because mistakes on either can come back to haunt you years down the line. Make sure that you seek experienced legal counsel when engaging in any real estate transaction.

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