Promissory Notes

The Promissory Note—Your Promise to Pay for Your House

A common mistake among home-buyers is the assumption that the mortgage is the legal obligation to repay the amount financed by the bank or lender. A mortgage establishes a security agreement, pledging your home as collateral for the loan. It’s the promissory note, however, that sets forth the terms of your payment—the interest rate, the number of years, the amount of your down payment, and the principal amount financed. With that information, you can calculate the amount of your monthly payment.

The terms of the promissory note will specify how it is to be repaid. Though promissory notes tied to the purchase of a home, known also as mortgage notes, typically require regular periodic payments for a specified length of time, a promissory note can all be a demand note, such that the lender may demand full repayment under its terms.

The promissory note identifies the parties, the obligations and the contingencies of the repayment agreement. For example, a promissory note will specify what constitutes a late payment, what constitutes default, and what remedies are available in the event of a default. Promissory notes frequently contain an “acceleration “clause, which allows the lender to seek payment of all amounts due if the debtor reaches a certain level of delinquency.

A promissory note to repay an amount financed for the purchase or renovation of a home will not be secured by the property unless the parties enter into a mortgage or security agreement. If you sell property to another person on an installment basis, it is critical that you record the lien or mortgage, so that you are protected if the person attempts to sell the property to a third party.