If you're thinking about buying property, it's smart to take the time to learn about the various types of debts. Unless you have the cash to buy your home outright, chances are you'll have to get a mortgage. You may have also heard the term "promissory" in relation to real estate transactions. Before you proceed with either type of loan, it's important to understand the differences between a mortgage and a promissory note.
As the name suggests, a promissory note is a promise to pay. It's a contractual agreement that involves two parties — a promisor (the person who is required to pay the money back) and the promissee (the lender) — that contains a specific set of repayment terms. For a contract to be legal, you need consideration, which is an exchange of value. In the case of a promissory note, the money given to the promisor and the promise given to the lender (along with interest payments) is the consideration needed to make it a binding contract.
In technical terms, a mortgage loan is a promissory note. The borrower agrees to pay the lender back the principal plus interest over a certain period of time in regular installments. If the borrower fails to pay back the mortgage, the lender can accelerate the debt, meaning that the entire debt becomes due. But you don't commonly hear mortgages referred to synonymously with promissory notes. A mortgage is a very specific type of promissory agreement related to real estate. The term "promissory note" is commonly associated with a student loan or a lending agreement between two friends.
A promissory note is commonly unsecured, which just means that it's not attached to a physical piece of property. A mortgage loan is a secured debt, meaning that the amount borrowed is backed by the real estate property the borrower purchases. If something goes wrong on the mortgage loan, the lender can take possession of the real property to cover his losses.
A basic promissory lender puts himself at a much greater risk than a mortgage lender for this reason — he does not have any property of value to recover immediately if the borrower defaults and refuses to pay the loan. But in some cases, a promissory lender can file for a judgment in court and get a lien against the borrower's assets.
Just because one party draws up a promissory agreement and lends money to another to purchase real property does not automatically make the lending party a mortgagor who can take the property in case of default. If the lender wants the lending agreement to be an official secured mortgage loan, he must file for a public lien on the property (mortgage) with the register of deeds in that county before making the loan.
- What Is a Seller-Financed Mortgage?
- How to Treat an Installment Land Contract as a Mortgage
- Requirements for a Home Mortgage
- What Is a Puisne Mortgage?
- Must Taxes Be Included in a Mortgage Payment?
- What Is a Secured Promissory Note?
- What Is a Non-Recourse Promissory Note?
- Can I Get a Loan While the Property Has a Lien on It?