Obtaining a mortgage for the purchase of any type of real estate property, whether residential or commercial, is a complex process that contains multiple steps, verifications, and agreements. Among its various elements, an important one that is crucial for the successful completion of the mortgage contract is the mortgage note. But what is a mortgage note exactly? What is its purpose? And how does it work? These are some questions that we will be answering in this article in addition to others.
What Is A Mortgage Note
A mortgage note, as the name suggests, is a type of legal document associated with a mortgage contract which is held in the custody of the mortgage lender for the entire term of the mortgage. The borrowers are also issued copies of the mortgage note to ensure complete transparency and avoid chances of mishandling. In addition to them, a county recording office is also required to possess the copies of the mortgage note.
The lender of the mortgage loan and the borrower sign this document during the mortgage closing process in order to complete the contract and begin the payments. This document becomes legally binding when signed and is a critical part of every mortgage agreement.
Its importance arises from the fact that this document contains all the essential details about the mortgage including the terms of the loan, the repayment schedules and monthly repayment amounts.
Also read: What Is a Mortgage? Types, How They Work
The document further details the rate of interest being imposed upon the borrower, the nature of the interest (fixed or ARM), as well as details of penalties which the borrower would incur if they fail to make the payments on time or miss any payments.
Another key factor which makes the mortgage note essential is that this note is responsible for classifying the property for which the mortgage is being secured, as a collateral, which the lender can retain or sell in the event of the borrower’s failure to repay the entire mortgage amount.
Components Of Mortgage Note
A mortgage note consists of two parts: A promissory note and a mortgage portion. The question of signing the mortgage note comes into play during the process of closing the mortgage contract. During this process, a company or attorney are typically involved in front of whom the signing procedures take place.
During the closing process, the lenders and borrowers sign on various contract documents including the mortgage note which contains critical details within its two components.
- The Promissory Note: This portion of the mortgage note contains a promise statement stating that the borrower promises to pay back the loan as per the terms of the mortgage contract. This portion contains details about the repayment schedules, amounts, and more which the borrower needs to adhere strictly to.
Some of the details contained in this portion include information such as:
- The exact amount or value of the mortgage loan taken by the borrower
- The nature of the repayments: whether monthly or bimonthly.
- The rate of interest being charged by the mortgage lender. In case of adjustable rate mortgages, the document will offer details of such adjustments to be carried out.
- The policies for penalty imposition in the event the borrower misses or delays payments.
- Policies regarding the option to pay in advance, and whether prepayments are supposed to be penalized.
- The amount of downpayment that the borrower needs to pay
- The Mortgage Portion: This is the part of the mortgage note which provides the lender of the mortgage the authority and right to retain the property in question if the borrower of the loan fails to adhere to its repayment terms, or defaults on making the loan repayment in full.
It is essential to note, however, that in order to sell the property or to refuse to return it to the borrower, the mortgage lender might have to undergo a very comprehensive and time-consuming judicial procedure.
Also read: Mortgage Note: What Is It And How Does It Work?
In most states, the mortgage lender will not be able to skip over the courts and go ahead with the property retention or sale.
Impact On Borrowers
A mortgage note can impact the borrowers in different ways based on whether they fail to repay the mortgage loan, refinance it, or successfully repay the entire amount as per the terms of the contract.
In case of Default
If the borrower fails to repay the mortgage or defaults, then the lender can choose to begin the foreclosure process. As mentioned, in cases of mortgage loans, these are judicial processes which demand court intervention.
However, if there is a deed of trust involved, the third-party trustee, who holds the legal title to the property, can, without any judicial process or court intervention, become the owner of the said property. In this case, they can also effectively choose to sell the property through a trustee’s sale, to make up for the amount lost.
In case of Refinancing
If the mortgage borrower chooses to refinance the original mortgage, they can use the amount being provided by the new loan to pay off the older one. In this case, they will be liable to pay off the new loan.
As they enter into the new contract, a new mortgage note will be created to accompany the new contract. This new note will be held by the new mortgage lender, and the borrower will also not be provided the mortgage note for the first loan until the complete mortgage is paid off.
When Payment Is Completed
Once the borrower has repaid the mortgage in full, they will be provided the mortgage note from the lender. This signifies that the property is no longer in control of the lender, and the borrower has complete and full ownership of the property without any terms and conditions.
A mortgage note is a vital part of a property mortgage which is signed by the lender and the borrower and held by the lender until the debt is completely repaid. This note holds an important place because its possession is critical for lenders if they need to proceed with foreclosure procedures in case the borrower defaults on the debt.
