The terms promissory note and mortgage note are used as on in the same, but a mortgage and a promissory note are two very different things.
A promissory note is basically an IOU on a loan. It is a promise to repay the loan amount to the owner.
Unlike a mortgage or deed of trust, the promissory note is not recorded in the county land records. The lender holds the promissory note while the loan is outstanding. When the loan is fully paid off, the note will be marked as paid in full and returned to the borrower.
Typically, the word mortgage is used to describe a loan on a property, however, the mortgage is not actually the “loan” it is the document that you give to the lender that creates a lien on the property.
The mortgage or deed of trust is recorded in the county land records, usually shortly after the borrower signs it, finalizing the transaction.
In the event the loan is fully paid off, the lender records a release (or satisfaction) of the mortgage or a deed of reconveyance (which is used in conjunction with deeds of trust) in the county land records.
Why Real Estate Notes Are Bought and Sold
A noteholder in the world of real estate is the person or party who receives payments on the note.
If a noteholder is having difficulty receiving regular and timely payments on the note, or if they are in need of a lump sum of cash, they may choose to sell the note to a real estate investor. They would sell the note at a discount since it is being purchased based on future payments using today’s dollars. The sale of the note provides the noteholder with instant access to cash and removes them from any further responsibility in collecting payments on the note.
An investor who purchases a promissory note often does so because it offers a versatile, collateral-backed real estate investment that is unaffected by the fluctuations of the stock market. Because the notes are purchased at a discount, an investor earns returns through the difference in the discounted purchase price and the real value of the note, as well as through regular monthly principal and interest payments. They can also offer a faster and higher return on investment than stocks and bonds.
Learn more about promissory note selling here.