Promissory Note vs. Mortgage

A mortgage, or mortgage loan, is a loan that allows a borrower to finance a home. You may also hear a mortgage called a home loan. These terms all mean the same thing. A mortgage is a loan secured by property that is used as collateral, which the lender can seize if the borrower defaults on the loan.

The promissory note is exactly what it sounds like — the borrower’s written, signed promise to repay the loan.

Promissory notes, also known as mortgage notes, are written agreements in which one party promises to pay another party a certain amount of money at a later date in time. Banks and borrowers typically agree to these notes during the mortgage process. When a borrower takes out a loan, promissory notes legally bind them to repay it.

Promissory notes also help private parties in owner financing safeguard the lending process. When a borrower pays the seller directly, mortgage lenders or banks are not involved. Owner financing refers to a loan from a private entity, as opposed to a traditional lender.

The note is a written contract that provides the lender with the power to enforce their rights through a lien, foreclosure or eviction.

A mortgage is a loan specifically for financing real estate. The mortgage gives a lender the right to take the property should a borrower fail to pay. During the repayment period, the title of the house is used as collateral to secure the loan.

Many consumers do not have the cash to purchase a property outright. And about 69% of U.S. households — 87.5 million households — were unable to afford a median-priced home in 2022, according to the National Association of Home Builders.

In the case of owner financing, the owner of the property is the lender, and the buyer makes payments to the property owner until the loan is paid off, at which point, the title is transferred to the buyer.

Each time you make a payment on your mortgage, you build equity. During this time, the lender owns more of the house than the borrower, and they have the title.

A title is a conceptual term that refers to a person’s ownership of a piece of property. Lenders relinquish the title to a property through the execution of a deed when the loan is paid off entirely, at which point the bank or private seller fills out the deed transferring title to the new owner.

This is the final step to fully owning a home or property. Once the title is acquired, the borrower becomes the owner and has the right to do what they please with the property.

Promissory notes and titles can be sold.

When a borrower fails to make the mortgage payments, the lender can pursue foreclosure by following state guidelines.