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Note vs Mortgage: Key Differences

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Note vs Mortgage: Key Differences | Debexpert

When it comes to real estate transactions and financing, two terms that often come up are "note" and "mortgage." While these terms are related, they have distinct meanings and play different roles in the lending process. In this article, we will explore the difference between note vs mortgage, providing a clear understanding of their significance in the world of real estate investing.

Key takeaways:
A note, or promissory note, is a document where the borrower promises to repay a sum of money to the lender according to specified terms. A mortgage, on the other hand, is a document that gives the lender the right to take ownership of the property (through foreclosure) if the borrower fails to meet the repayment terms in the note.

Understanding Promissory Notes

Promissory notes, sometimes referred to as mortgage promissory notes, mortgage notes or simply notes, stand as a crucial legal document in a loan agreement. They act as an IOU from a borrower to a mortgage lender, constituting a legally binding commitment to repay a certain sum of money, commonly referred to as a loan, often a home loan. The terms of the promissory note detail the loan's principal amount, the interest rate, repayment schedule, and any additional conditions.

Promissory notes aren't confined to banking institutions; they have a wide range of applications. For instance, they form an integral part of owner-financed real estate transactions, where the seller provides financing to the buyer, and the borrower pays a down payment with the balance represented by the note. Promissory notes also feature in private lending where investors seeking to earn passive income extend loans for real estate purchases and rehabilitation.

Key Components of a Promissory Note

Every promissory note is unique, but there are essential components that should be included:

  1. Loan Amount: The specific amount of money borrowed by the borrower.
  2. Borrowers' Names: The names of the individuals or entities responsible for repaying the loan.
  3. Interest Rate: The percentage charged by the lender for borrowing the money.
  4. Repayment Schedule: The agreed-upon plan for repaying the loan, including the term to maturity (number of years) and any balloon payments.
  5. Late Charge Penalty: The predetermined penalty amount in case of late or missed payments.

It's important to note that promissory notes are not recorded in county records. Instead, they are held by the lender and returned to the borrower marked as "paid in full" once the loan has been repaid.

Exploring Mortgages and Deeds of Trust

A promissory note shouldn't be confused with a mortgage or deed of trust, although the terms often appear together. While a mortgage note denotes the borrower's written commitment to repay, a mortgage or deed of trust offers the lender a security interest in the mortgaged property, acting as a shield against the borrower's potential default. The deed of trust or mortgage describes the legal mechanism granting the lender the right to claim the property in case of default.

In a mortgage setup, the property serves as collateral. If the borrower defaults, the lender, armed with the mortgage lien, can initiate a judicial foreclosure process to sell the property and recover the outstanding debt. Contrastingly, a deed of trust introduces a third party - the trustee, who holds the legal title to the property until the loan, or the mortgage loan, is settled in full.

The Role of Mortgages in Default Situations

When it comes to mortgage positions, the ranking can significantly affect the outcome in a default situation. First position mortgages are prioritized over most other liens, barring certain legal exceptions like property tax liens. Second position mortgages only come into play once the first mortgage is satisfied. The added risk carried by lenders holding second position mortgages often leads to higher interest rates to compensate for potential loss.

Upon a borrower's default, the lender can invoke the acceleration clause, making the full loan amount due immediately. Before pursuing foreclosure, however, the lender must provide sufficient notice to the borrower and a chance to rectify the default. Foreclosure is a legal, but often time-consuming and costly, process. To avoid this, mortgage lenders may accept a deed in lieu of foreclosure or even sell the defaulted loan to another investor who can find a resolution with the borrower.

Components of a Mortgage

A mortgage or deed of trust should include the following essential components:

  1. Borrowers' Names: The individuals or entities responsible for repaying the loan.
  2. Real Estate Address: The physical address of the property being used as collateral.
  3. Mortgage Note Description: A detailed description of the property's boundaries and characteristics.

Mortgages and deeds of trust are recorded in the county land records shortly after the borrowers sign them. Once the loan is fully repaid, the lender records a release or satisfaction of mortgage, indicating that the debt has been settled.

Understanding Mortgage Position

Mortgages can be recorded in either the first or second position. A mortgage in the first position takes priority over most other liens in a foreclosure. However, certain types of liens, such as property tax liens, can supersede even a first position mortgage.

A second position mortgage, on the other hand, is settled only after the first position lien has been satisfied in full. Lenders holding second position mortgages face a higher risk, as they may lose some or all of their money if the proceeds from the property sale are insufficient to satisfy the first position lender. Consequently, second position mortgages typically attract higher interest rates to compensate for the increased risk.

Investing in and Transferring Mortgage Notes

Mortgage notes can be an enticing investment opportunity, generating consistent monthly payments and secured by real property. These notes can be bought and sold, allowing even passive income seekers to participate. During the transfer of a real estate note, an assignment document transfers ownership legally from one party to another, with the details recorded in county land records.

Notes can be classified as performing or non-performing based on whether the borrower is up to date on payments. While performing notes are generally considered low risk and stable, non-performing notes are often sold at significant discounts. Savvy investors can potentially modify loan terms, offer forbearance, or even pursue foreclosure to recoup their investment.

Performing vs Non-Performing Notes

Mortgage notes can be categorized as performing or non-performing based on the borrower's payment status. A performing note indicates that the borrower is up to date on all payments, while a non-performing note signifies that the borrower has defaulted, typically by 90 days or more.

Performing notes with borrowers who have good credit, valuable collateral, and favorable terms are considered safe investments that offer stable income and attractive returns. On the other hand, non-performing notes are often sold at significant discounts to their face value. Investors who have the resources and expertise can potentially modify the loan terms, offer forbearance to the borrower, or pursue foreclosure to recover their investment.

Distinguishing Note vs Mortgage

In the realm of real estate and finance, understanding the difference between a note and a mortgage is fundamental. When asking, "what is the difference between the note and the mortgage," or "what is the difference between a mortgage and a note," it comes down to this: the note, or promissory note, represents a promise to pay, while the mortgage secures that promise. Regardless of your interest in real estate investing, understanding these nuances is key to making informed and successful investment decisions.


Comprehending the difference between a note and a mortgage — often phrased as 'mortgage vs note' — is essential for anyone involved in real estate investing or financing. While a promissory note signifies the borrower's pledge to repay a loan, a mortgage or deed of trust is what secures this promise, acting as a safety net for the lender. When you ask, "what is the difference between the note and the mortgage," or "what is the difference between a mortgage and a note," it boils down to this distinction: the former is a promise to pay, the latter provides security for that promise.

For those who are looking to diversify their real estate investments, another option to consider is to sell mortgage notes. This can provide liquidity, allowing you to cash out on your investment while transferring the responsibility and benefits to another investor.

In understanding these characteristics of both mortgage notes and mortgages, or "mortgage note vs mortgage," investors can make informed decisions and confidently navigate the real estate world. Regardless of whether you're contemplating investing in mortgage notes, selling them, or exploring other avenues of real estate investing, conducting thorough research and seeking professional advice is the key to making successful and profitable investments.

Written by
Henry Arora
Head of Business Development

Experienced Manager with a demonstrated history of working in the Fintech/Customer services/Debt Collections industry. Skilled in Management, Debt Collections Sales, Leadership, Team Management, and Public Speaking. Strong operations professional graduated from Madhurai Kamraj University.

  • Fintech/Customer services Expert
  • Public Speaking
  • Debt collection Expert



Who holds a mortgage note?

The mortgage note is the legal document that proves ownership of the mortgage loan to the lender or investor. A mortgage-backed securities investor is one potential buyer of a note that has been sold by the original lender. Payments due from the borrower are to be made to the note holder, who may also opt to sell or transfer the note to another person. The capacity to collect mortgage payments or foreclose in the case of default is dependent on the lender's ability to track down the note's current holder.

How do Debt Buyers Make Money?

Debt buyers collect the debt purchased from a lender—those borrowers who pay and will make up the income of the debt purchaser.‍

Who Buys Promissory Notes?

A promissory note is an agreement between two or more parties where the borrower party promises to pay a sum to the lender party on certain terms and conditions as agreed upon. The note on which the agreement is made is called a promissory note. When the lender party decides to sell the note, it can be bought by any private firms or institutions dealing with debt buying. Typically, such entities hold licenses to buy and sell debt in the debt investment market. 

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