What is a Promissory Note?
A promissory note is a written, legally binding promise by a borrower to repay a specific amount of money to a lender under defined terms. In real estate, the promissory note is one of two key documents in a mortgage transaction: the note establishes the debt (how much, what interest rate, repayment schedule, penalties for default), and the deed of trust or mortgage secures the debt with the property as collateral.
What the note contains
Principal amount, interest rate (fixed or adjustable), payment amount and schedule, maturity date, late payment penalties, prepayment provisions (whether the borrower can pay early and any penalties), acceleration clause (the lender can demand full repayment if the borrower defaults), and the borrower's personal liability.
Note vs mortgage
The promissory note is the promise to pay. The mortgage or deed of trust is the security instrument that ties the promise to the property. The note creates personal liability for the borrower. The mortgage creates a lien on the property. You can have a note without a mortgage (unsecured debt), but you cannot have a mortgage without a note.
Notes as investments
Promissory notes themselves can be bought and sold. Note investors purchase existing notes (often at a discount) from banks, owner-finance sellers, and other lenders. If you buy a $100,000 note for $80,000 and the borrower continues paying, your yield is significantly higher than the note's face interest rate. Non-performing notes (where the borrower has stopped paying) can be purchased at steep discounts with the goal of modifying the loan or foreclosing.
For wholesalers
Promissory notes are relevant when working with creative financing. If you negotiate seller financing, the note documents the loan terms. Understanding note structure helps you create attractive financing packages for buyers who need terms rather than all-cash deals.