Mortgage Note

A mortgage note is the written instrument in which a borrower promises to repay money borrowed to buy or refinance real property, on terms the note itself sets out. It is usually titled just "Note", and it is one half of a pair: a mortgage takes both a note and a security instrument, and the security instrument, called a mortgage in some states and a deed of trust in others, is what pledges the house. The note says what is owed and how it is to be paid. The security instrument says what the lender may do to the property if the note is not paid.

California's Commercial Code puts the definition in a single clause. Under section 3104(e), an instrument "is a 'note' if it is a promise". The word "instrument" is doing work there: subdivisions (a) and (b) of the same section define it as a negotiable instrument, meaning "an unconditional promise or order to pay a fixed amount of money" that meets the section's other conditions. The same section, at subdivision (a)(3)(i), allows that promise to carry "an undertaking or power to give, maintain, or protect collateral to secure payment" without ceasing to qualify. That is the statutory reason a mortgage note can point at a house and still be a note rather than a hybrid: the collateral is referred to, not incorporated.

What lives in the note, and what does not. The note carries the principal amount, the interest rate and the mechanics of any change to it, the monthly payment and the day it is due, the maturity date, the grace period before a payment is late, the late charge and how it is computed, the borrower's right to prepay and any charge for doing so, the lender's right to accelerate the entire unpaid balance after a default, and the addresses for notices. The security instrument carries the description of the property, the borrower's obligations to insure and maintain it and to pay property taxes, the escrow arrangement, and the remedies that run against the house. When a borrower asks "what does my loan say about X", the answer is almost always in one document rather than the other, and knowing which one saves a great deal of time. Neither document moves anyone out: under California's Civil Code section 2920(a), a mortgage is a contract by which property "is hypothecated for the performance of an act, without the necessity of a change of possession", which is the formal statement of the obvious fact that a borrower lives in the pledged house.

The note is the personal obligation. Foreclosure is a remedy against the property, and it is the security instrument that supplies it. The note is the reason a lender has a claim against the borrower at all. Two practical consequences follow. A person who signs the note is liable for the debt even if their name never appears on the deed, and a person whose name comes off the deed is still liable on the note they signed, because only the lender can release a borrower.

Notes are built to change hands. A home loan is commonly sold shortly after closing, and the debt and the collateral do not separate when that happens. California's Civil Code section 2936 states the rule in one sentence: "The assignment of a debt secured by mortgage carries with it the security." So the buyer of the note takes the lien with it, and the borrower owes the same amount on the same terms to a different holder. What a borrower actually notices is usually a change in servicer rather than a change in owner, and the two are separate events that often happen together. The terms themselves cannot be rewritten by a sale; changing them requires the borrower's agreement, which is what a modification is.

At a closing the borrower signs the note and the security instrument in the same sitting. The security instrument is recorded in the county land records, which is what puts the lien on the public record; the note is not recorded, and the holder keeps it. From then on the note is the reference document for every question about the money, and the recorded instrument is the reference document for every question about the house.

A hypothetical, to show which document answers which question. Priya's note states a principal balance, a fixed rate, a principal-and-interest payment of $1,850 due on the first of each month, a grace period of 15 days, and a late charge of 4 percent of the overdue payment. She pays on the 20th. The note is the document that tells her the payment was late and what the charge is: 4 percent of $1,850, or $74. It is also the document that says the lender may demand the entire unpaid balance if the default is not cured after notice. Nothing in that sequence comes from the recorded instrument until the lender decides to proceed against the house itself.

Pros

• The note is short, it is written in ordinary sentences, and it contains nearly every number a borrower cares about. It repays reading in a way the recorded instrument usually does not.
• Separating the promise from the collateral is what lets a lender sell the loan without disturbing the borrower's terms.
• Because the note fixes the payment, the rate mechanics and the late charge in writing, a servicer's statement can be checked against it rather than taken on faith.

Cons

• Personal liability survives things people expect to end it. Coming off the deed, separating, or handing the keys back does not release a borrower who signed the note.
• Borrowers frequently never receive a copy at closing and do not think to ask for one, which makes the first dispute harder than it needed to be.
• The loan can be sold repeatedly without the borrower's consent, so the party enforcing the note years later is often not the one who made it.
• Terms that only bite later, such as an acceleration clause or a variable-rate formula, are easy to sign past on a day already crowded with documents.