A mortgage note is basically a proof of a mortgage or a debt. It is an agreement, which specifies the amount of the loan and the terms and conditions under which the loan is extended. In other words, a note is a written promise, which specifies the amount of money borrowed at a specified rate of interest. The borrower is obligated to pay for the loan subject to the terms and conditions mentioned in the note. The borrower who signs on the note is personally responsible for ensuring that the loan is paid back within the stipulated time frame. The promissory note can be a mortgage note, real estate note, private seller residential mortgage note, a note for a small business loan, or any other type of note.
In most cases, the rate of interest associated with a mortgage note is variable or adjustable in that the rate of interest on the note is periodically adjusted. It naturally follows that the payments made by the borrower change over a period of time depending on the prevalent rate of interest. The risk is such a scenario is more with the borrower than the lender; if the rate of interest falls, the borrower benefits and vice versa. To limit the risk to the borrowers, limitations on charges, commonly known as caps, are applied in the industry. In a layman’s term, these caps characterize the frequency, periodic and the total change in the rate of interest till the time the loan is repaid. For example, the caps may involve the interest adjustments to be made only once a year. In some cases, the variation of the rate of interest on these mortgage notes can be adjusted to not more than one percent in a year. In some cases, the total adjustment in a rate of interest may be fixed to five percent. Yet another common cap is putting a limit on the total amount of payment to be in a month, for example, a borrower may not be required to pay more than $ 1000 per month.
The mortgage notes with variable rates of interest are very common in Australia and New Zealand, especially with the people who intend to move from a place within a short period of time. This is mainly because they offer a lower fixed rate of interest during the first few initial years after which the rates begin to fluctuate.
Consider a situation when the owner of the promissory note is in an immediate need of liquid cash and is not in a position to wait for a time period stretching over to thirty years or so. In all such situations, the owner can sell the mortgage note to companies or investors who buy these notes in exchange of cash.
Then there are companies or investors who have adequate capital to purchase the mortgage notes. In this scenario, the companies or investors pay the cash to the person who is holding a private mortgage and they will then receive the monthly payments instead of the original owner of the note. For investors and companies, these notes are usually those that are secured by real estate.
The advantage of a mortgage note is that the interest is collected on monthly basis. Also, if you plan to sell your note, you’ll find that you can receive your cash in as little as 7 to 15 business days, which amounts to the same time taken to arrange a mortgage or another type of loan.
Consider a situation when you need cash to pay for your child’s schooling. May be in a situation like this, you may not require to fully cash your note. So if you decide that you do not want to sell your entire note, you can sell only a portion of it.