Saturday, December 19, 2009

What is a promissory note?

When you sign all the documents that go along with giving a mortgage, you will sign what is called a promissory note (also referred to simply as a note). This is the document that sets out the terms of the loan, and as the name implies, is your promise to repay the money. The mortgage is the document that puts up your real estate to secure repayment. In other words, the promissory note describes how much you are borrowing and the terms of the loan, while the mortgage is what gives the bank the right to take your home if you do not live up to what you agree to do in the promissory note. It is common for the mortgage to restate all the terms of the note, making the documents sometimes look very similar. However, they have very distinct purposes.

The reason the note is so important is because it is a negotiable instrument. Negotiable instruments are what make the system work. A buyer of a negotiable instrument, as long as the procedure is done properly, becomes a holder in due course. The point behind a holder in due course is that once the loan has been sold, you may be stuck with it—even if you did not fully understand the terms or there were irregularities because of a dishonest original lender.

Negotiable instruments are treated differently from other contractual promises. They must be in a certain form (they are sometimes called form or formal contracts.) When in the proper form, they create rights for those to whom they are transferred (those who buy them) that other contracts do not.

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