Do You Know the Difference Between a Note and a Mortgage?

Real estate is filled with terms that are often used 1) interchangeably and/or 2) erroneously.  The terms loan, mortgage, deed of trust and note are among those terms frequently used and misused. Our thanks to Mid-Atlantic Settlement Services for this easy to understand tutorial on the true distinction between a note and a mortgage.

Note

A note or promissory note is a contract whereby a party makes a promise to pay a sum of money to another party under specific terms.  In real estate, the party is typically a borrower who agrees to make monthly payments of principal and interest over 20 or 30 years to a lender.

“The note has virtually nothing to do with the property itself and can technically exist without any collateral at all.  If the borrower doesn’t pay, the lender can sue ‘under the note’ and obtain remedies for breaching that contract.”

Mortgage or Deed of Trust

For the purpose of this explanation we are going to use mortgage and deed of trust interchangeably.  A mortgage is a transfer of an interest in property.  Mortgages are tied to the debt created by a note, but a mortgage in and of itself is NOT a promise to pay the debt. 

In fact, it is not a promise to pay anything.  “Instead, it contains ‘granting’ language  – like a deed – which gives the lender the right to take the property if the borrower goes into default and doesn’t pay under the terms of the note.”  (And if you really want to know the difference between a mortgage and a deed of trust, click here.)

Key Differences

  • A note is signed by the people who agree to pay the debt.  A mortgage is signed by those who own the property being mortgaged.  In residential real estate, the signers of the note and the mortgage are typically the same.  A commercial transaction more often involves a corporate entity holding the mortgage, while principals sign the note.
  • A mortgage needs to be recorded in the county or town recording office, the note does not.  Instead, the note goes directly to the lender (and may then be sold to another lender.)

Questions?  Want to sign a note and a mortgage for property in Northern Virginia?  Give me a call at 703.927.4554 and let’s talk.

Michael