When you take out a loan to buy a property, you'll likely hear two terms mentioned frequently: mortgage and note. These two terms are often used interchangeably, but they actually refer to different things.

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The Mortgage

The mortgage is a legal agreement between you (the borrower) and your lender. It gives the lender a security interest in your property, which means that if you don't make your payments as agreed, the lender has the right to foreclose on your home and sell it to recoup their losses.

A mortgage typically includes details such as:

  • The amount of money being borrowed
  • The interest rate on the loan
  • The term of the loan (usually 15 or 30 years)
  • Whether there are any prepayment penalties
  • Details about property taxes and insurance

When you sign a mortgage agreement, you're agreeing to repay the loan according to these terms. The mortgage is recorded with your local county recorder's office so that it becomes a public record.

The Note

The note is a legal document that outlines your promise to repay the loan. It includes details such as:

  • The amount of money being borrowed
  • The interest rate on the loan
  • Your repayment schedule (monthly payments for 15 or 30 years) >
    li>Penalties for late payment
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  • Whether the loan is secured by the property

The note is not recorded with any government agency, so it's kept private between you and your lender. While the mortgage gives your lender the right to foreclose on your home if you don't make your payments, it's the note that establishes your legal obligation to repay the loan.

Why It Matters

Understanding the difference between a mortgage and a note is important because they serve different purposes. The mortgage gives your lender a security interest in your property, while the note establishes your legal obligation to repay the loan. If you default on your loan, your lender will use the terms outlined in both documents to determine their next steps.

Additionally, if you decide to sell or refinance your home before you've paid off the entire loan amount, both documents will be used to calculate how much money you owe.