Rachel Christian, Annuity.org Writer
  • Written By
    Rachel Christian

    Rachel Christian

    Financial Writer and Certified Educator in Personal Finance

    Rachel Christian is a writer and researcher focusing on important, complex topics surrounding finance and investments. She is a Certified Educator in Personal Finance with FinCert, a division of the Institute for Financial Literacy, and a member of the Association for Financial Counseling & Planning Education (AFCPE).

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    Kim Borwick
    Kim Borwick, Financial Editor for Annuity.org

    Kim Borwick

    Financial Editor

    Kim Borwick is a writer and editor who studies financial literacy and retirement annuities. She has extensive experience with editing educational content and financial topics for Annuity.org.

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    Thomas J. Brock, CFA®, CPA
    Thomas Brock, CFA, CPA, expert contributor to Annuity.org

    Thomas J. Brock, CFA®, CPA

    Expert Contributor

    Thomas Brock, CFA®, CPA, is a financial professional with over 20 years of experience in investments, corporate finance and accounting. He currently oversees the investment operation for a $4 billion super-regional insurance carrier.

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  • Updated: March 13, 2023
  • 8 min read time
  • This page features 8 Cited Research Articles
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Cite Us
How to Cite Annuity.org's Article

APA Christian, R. (2023, March 13). Promissory Note vs. Mortgage. Annuity.org. Retrieved April 1, 2023, from https://www.annuity.org/selling-payments/mortgage-notes/promissory-note-vs-mortgage/

MLA Christian, Rachel. "Promissory Note vs. Mortgage." Annuity.org, 13 Mar 2023, https://www.annuity.org/selling-payments/mortgage-notes/promissory-note-vs-mortgage/.

Chicago Christian, Rachel. "Promissory Note vs. Mortgage." Annuity.org. Last modified March 13, 2023. https://www.annuity.org/selling-payments/mortgage-notes/promissory-note-vs-mortgage/.

Key Takeaways
  • A mortgage is a loan secured by real property: land, houses or other buildings.
  • A promissory note — sometimes called a mortgage note — is a written promise spelling out the terms of the mortgage.
  • Promissory notes are legally binding documents that require a borrower to repay the lender for the mortgage loan.

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

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.

What Is a Mortgage?

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.

Deeds and Titles

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.

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What Can Be Sold?

Promissory notes and titles can be sold.

Selling a Promissory Note
The person who owns the promissory note may sell it. Lenders typically sell promissory notes when they no longer want to be responsible for the loan or they need a lump sum of cash. The buyer of the note assumes the responsibility of collecting the money. The terms of the note can be changed if both parties make new arrangements, but the original agreement stands after the sale.
Selling a Title
A property owner may sell the title to the property, which involves drawing up a deed to transfer the title to a new owner.

What Happens When a Borrower Defaults on a Mortgage

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

According to a study by Wharton University of Pennsylvania, states impose several requirements on lenders who want to foreclose on a property, concerning the following:
  • The number and timing of notices that the lender must send.
  • Whether the borrower holds a statutory right to cure the default.
  • The length of any post-sale redemption period.
  • Whether the lender is permitted to pursue a post-sale deficiency judgment, allowing it to seize other borrower assets.

FAQs About Promissory Notes and Mortgages

What is a promissory note without a mortgage?
With a mortgage, the promissory note — or mortgage note — is secured by the property named in the mortgage. If you don’t pay, you forfeit the property to the lender. An unsecured promissory note is a legal obligation to repay a loan, but without property to secure that obligation.
What happens to a promissory note when the lender dies?
If the lender dies, the promissory note becomes an asset of the lender’s estate and the borrower is still under a legal obligation to pay it off. The exception is if the note includes language that the debt will be forgiven in the event of death.
Is a promissory note or loan agreement better?
The amount of money and the trustworthiness of the borrower are the main considerations when deciding between a promissory note or loan agreement. If the amount of the loan is small and you trust the borrower, a promissory note may be a better option. But if the loan involves a large amount of money and trustworthiness is uncertain, a secured loan agreement is a better option.
Please seek the advice of a qualified professional before making financial decisions.
Last Modified: March 13, 2023

8 Cited Research Articles

Annuity.org writers adhere to strict sourcing guidelines and use only credible sources of information, including authoritative financial publications, academic organizations, peer-reviewed journals, highly regarded nonprofit organizations, government reports, court records and interviews with qualified experts. You can read more about our commitment to accuracy, fairness and transparency in our editorial guidelines.

  1. National Association of Home Builders. (2022, February 15). Nearly 7 out of 10 Households Can't Afford a New Median-Priced Home. Retrieved from https://www.nahb.org/blog/2022/02/nearly-7-out-of-10-households-cant-afford-a-new-median-priced-home/
  2. Consumer Financial Protection Bureau. (2017, February). What is a mortgage? Retrieved from https://www.consumerfinance.gov/ask-cfpb/what-is-a-mortgage-en-99/
  3. Joint Center for Housing Studies of Harvard University. (2017). The State of the Nation’s Housing. Retrieved from https://www.jchs.harvard.edu/sites/default/files/harvard_jchs_state_of_the_nations_housing_2017_chap1.pdf
  4. U.S. Securities and Exchange Commission. (n.d.). Promissory Notes. Retrieved from https://www.investor.gov/protect-your-investments/fraud/types-fraud/promissory-notes
  5. Loftsgordon, A. (2020, March 14). The Difference Between a Promissory Note and a Mortgage. Retrieved from https://www.lawyers.com/legal-info/bankruptcy/foreclosures/the-difference-between-a-promissory-note-and-a-mortgage.html
  6. LegalNature.com. (2019, October). Using a Promissory Note to Purchase a Home. Retrieved from https://www.legalnature.com/guides/using-a-promissory-note-to-purchase-a-home
  7. RocketLawyer.com. (2012, August). What's the Difference Between a Property Deed and a Title?. Retrieved from https://www.rocketlawyer.com/article/whats-the-difference-between-a-property-deed-and-a-title-ps.rl
  8. Feinstein, B.D. (2020). State Foreclosure Law: A Neglected Element of the Housing Finance Debate. Retrieved from https://publicpolicy.wharton.upenn.edu/issue-brief/v6n10.php