How a Mortgage Note Works

A mortgage note is the agreement between a lender and the buyer of a home or property.  It contains the promise by the buyer to repay the amount of money loaned, plus interest, over a specified period of time to the mortgages lender.  A mortgage note has become a very detailed document containing all the information needed to understand what the money is being borrowed for, how much is being borrowed, and when it will be repaid.

Contents of a Mortgage Note

While many banks and mortgage companies advertise for shorter mortgage notes and less paperwork, in today’s litigious society, it is important to be sure all the vital elements of a loan for often hundreds of thousands of dollars are clear and adhere to the laws governing mortgage loans.  That means most mortgage notes will include these elements:

• The legal names of the lender who grants the loan as well as the property owner who is granted the loan
• A detailed property description to ensure there will be no disputes over the exact dimensions of the property being used as security for the loan
• Official signatures that are duly notarized to ensure the documents carry all the weight of the law
• The specific terms of the agreement  to clarify how much is borrowed, the length of the contract, the interest rate, the installment payments for the length of the contract, including any balloon payments that may be included
• Any encumbrances that may be attached to the property from a previous owner.
• All the necessary covenants, conditions, and restrictions that apply to that type of loan in that jurisdiction
• If there are any guarantees for the loan from such institutions as Fannie Mae, Freddie Mac, or Ginnie Mae against default on the part of the homeowner

Types of Mortgage Notes   

There are several types of mortgage notes that can be granted to property buyers, depending on the market, the credit rating of the purchaser, the kind of property used as security, and more.

• Fixed mortgage rates, in which the interest rate remains the same throughout the life of the mortgage, although the percentages of each payment which apply to the principal and interest change as the interest is paid down and more principal is paid each month
• Adjustable rate mortgages, in which the interest rate changes over the life of the loan.  It often starts low and then changes in relation to the economy.  The interest rate is usually tied to a specific index in the economy, such as T-bills
• Balloon loans, whereby the borrower usually has a low interest rate at the beginning of the loan with a large balloon payment due at the end of the loan agreement period.  Often these loans also have adjustable interest rates, which means that in a depressed economy, the balloon payment can be larger than anticipated
• FHA and VA loans, which are offered by the government or qualified lenders and are guaranteed by the government.  There are also fees and interest rates unique to these loans.  There are higher requirements for income and down payment, among other things, that can make these loans more difficult to obtain

Because of the complexity of mortgage notes and the various types of mortgage services to choose from, it can be daunting to attempt to determine what is right for you and your transaction.  It is often advisable to consult a real estate lawyer to ensure that the mortgage note is complete and error free, and to give you mortgage advice that is right for you.