What does "Promissory note" mean in real estate?
A promissory note in real estate is a written, legally binding promise by a borrower to repay a specific sum of money to a lender under agreed terms. Think of it as the loan’s IOU: it records the principal, interest rate, payment schedule, maturity date and remedies for late or missed payments. While a mortgage or deed of trust secures the loan with the property, the promissory note is the actual “promise to pay” the debt.
Key components
- Principal amount: the total borrowed.
- Interest rate: fixed or adjustable (terms for ARMs).
- Repayment schedule: monthly payment amount, due dates and where to send payments.
- Maturity date: when the loan must be repaid in full.
- Late fee and default provisions: penalties and lender remedies if payments aren’t made.
- Signatures: borrower (and cosigner, if any) signs to make it enforceable.
How promissory notes are used in real estate
Promissory notes appear in nearly every type of home loan transaction:
- Traditional mortgages: Borrowers sign a promissory note at closing that sets the repayment terms; the lender typically holds the original note until payoff.
- Refinances and home equity borrowing: A new note is signed when you refinance or take a home equity loan or HELOC, reflecting updated terms and balances.
- Seller financing: When the seller funds the purchase, the buyer signs a promissory note to the seller instead of a bank (seller financing).
- Construction loans: Short-term promissory notes govern draws and repayment during construction; they may convert to a standard mortgage when building is complete (construction loan).
- Private loans between individuals: Family or friends can use a promissory note to formalize repayment terms and reduce misunderstandings.
Real-world examples
- First-time homebuyer: Jane signs a note for $250,000 at 3.5% over 30 years. The note spells out monthly payments, due dates and default consequences.
- Seller-financed purchase: Tom sells his house and accepts a note from Linda to receive $200,000 over 10 years at 5% interest.
- Family loan: Mike’s parents lend $50,000 for a down payment and document the repayment schedule with a simple promissory note.
Why promissory notes matter to homebuyers
The promissory note is one of the most important loan documents you’ll sign because it defines your legal obligation to repay. If a borrower defaults, the lender uses the note as evidence of the debt and the basis to pursue collection or foreclosure through the associated mortgage or deed of trust. Even when the security instrument gets more attention (because it affects the property), the note is the core debt instrument.
Practical tips
- Read the note carefully before signing—know the interest rate, payment amount, due date and maturity date.
- Keep the original note in a safe place; the lender often returns it marked “paid in full” when the loan is satisfied.
- If you’re getting seller financing or a private loan, consider having the note drafted or reviewed by a lawyer to ensure enforceability and clarity.
- When refinancing, confirm how the old note is replaced and how payoff will be documented.
In short, a promissory note is the legal promise to repay in virtually every real estate loan. It protects lenders by documenting the debt and protects borrowers by clearly stating the terms they’ve agreed to. Understanding the note helps you know exactly what you owe and what can happen if payments aren’t made.
