Unless you’re lucky enough to be able to pay cash, you’re going to need a lender to fund your real estate purchase. That means learning the language of loans very quickly.
Two important documents that are involved in most real estate transactions are the mortgage and the promissory note. Despite popular misconceptions, they’re not the same thing.
What’s a mortgage?
A mortgage is the document that secures your loan with the property that you are buying used as collateral. Essentially, it’s the paperwork that allows the lender to place a lien on the property so that they can initiate foreclosure proceedings if you were to default on the payments.
What’s a promissory note?
A promissory note is essentially an “IOU” from a borrower to a lender. It’s a legal agreement in which the borrower promises to repay the loan for the property according to whatever terms are established. It also lays out any consequences for the failure to repay.
The chief difference between the two is that “all mortgage notes are promissory notes” but the reverse is not necessarily true. As an investor, you may be asked to sign a personal promissory note to help your company or another party secure a mortgage – and that could put your personal finances at greater risk if there’s a default.
There’s a lot of terminology unique to the real estate industry, and it can get confusing if you’re unfamiliar with the language. Getting experienced legal guidance is always wisest when you’re investing in real estate, whether it is a residential or commercial property.
