What Is A Mortgage Note?

Definition and Overview

In simplest terms, a mortgage note is a written promise (i.e. promissory note) to repay a specific amount of money loaned plus all interest, repaid in equal monthly payments over a prescribed length of time, and therefore fulfilling the promise to repay.  The amount of the original debt and the interest rate are typically stated on the mortgage note.  The borrower’s signature on the note indicates that they are personally responsible for repaying the loan.

Although it is extremely rare, there have been cases where the purchaser of the mortgage note took over the remaining payments only.  Additionally, the most common form of purchasing a mortgage note is referred to as a “partial purchase.”  This occurs when the buyer does not offer to purchase the entire note, but instead agrees to buy only a portion of the remaining payments.

Types of Mortgage Notes and Determinants

Typically, the specific “type” of mortgage is determined by the mortgage note itself.  For the most part, the following are the 6 most common mortgage types and what classifies or defines the type of mortgage:

  • Adjustable Rate Mortgage (ARM) – floating interest and repayment rates
  • Balloon Payment Mortgage – indicated by an amortization schedule that exceeds the maturity date.
  • Fixed Rate Mortgage (FRM) – fixed interest and repayment rates
  • Graduate Payment Mortgage (GPM) – adjusting payments and a fixed rate of interest
  • Interest-Only Loan – only the interest is repaid in the payment schedule, principal is due in full at maturity
  • Negative Amortization – a mortgage which allows this contains a payment adjustments frequency which is usually less than the frequency of the interest rate adjustments

Advantages and Disadvantages of Selling a Mortgage Note

Rather than holding onto a mortgage note, many note holders will opt for selling the note.  This is becoming more apparent as the economy becomes more volatile.  There are certain advantages to selling a mortgage note versus holding onto it including:

  • It removes the risk of encountering default by the borrower and having to foreclose on them
  • It removes the worry associated with whether or not the mortgagor has maintained their home and paid all applicable property taxes
  • There is no more monitoring of the tax assessor necessary to see whether or not the borrower is incurring liens against the home
  • No longer is there the necessity of keeping detailed payment records or having to report the interest payments to the specified tax authorities
  • You typically will receive a lump cash sum very quickly
  • You’ll be able to have a cash cushion if economic times get rougher or have the money to re-invest in other lucrative opportunities

Along with the advantages of selling a mortgage note comes these 3 disadvantages:

  • When you sell the note, you’re monthly cash flow/income is gone
  • If you’ve been spreading out the gain on the loan over the life of the note, you may have to show the total gain remaining where your taxes are concerned
  • You’ll have to take a discount on the loan balance due to the “time value” of money