Take out your wallet and you will find many notes. Each bill is actually a Federal Reserve bill and is printed: “This bill is legal tender for all debts, public and private.”
So a promissory note can be something as simple as a small piece of paper that promises to pay you an amount, or you can use it as legal tender to pay off a debt. Even a napkin scrawled with the amount, terms, payment, and a signature is a note. This is a non-guaranteed note form.
When you buy a car, your contract is also a promissory note, since you are paying a certain amount, at a certain interest rate, for so many months. So we see that notes can be written for many transactions.
A real estate note is a similar document; although it is generally an amortized payment plan, usually four to five pages describing the same information. Amortized literally means to kill. You will pay the promissory note and interest on the final payment in full.
The promissory note is different from the mortgage, which is the security document related to the property, so it is secured. The promissory note is the promise to repay the mortgage loan and the debt is secured by the mortgage. It describes the amount of money you are borrowing from the lender, at a certain interest rate, for a certain time. That rate can remain fixed and the payment will remain the same throughout the term of the note. The note can also have a variable interest rate, usually tied to the prime rate, and the monthly payment varies as the interest rate rises or falls.
Other Note features sometimes allow you to pay it early or not; with and without penalty, any loan fees and what happens when you default. A key feature of most, if not all, mortgages is the ability to sell all or part of the note to other investors.
Some notes have a balloon payment, which means that the entire balance is due after a short period of time. After the home collapse, most of the balloon payments go unused on consumer home purchases due to the ability to cause problems for the homeowner if unable to increase the amount owed by another lender.
As long as the homeowner makes the payments, it is considered a performance note and as you continue to pay, it will continue to do so. It has a high resale value, typically between 75% and 85% of the UPB (outstanding principal balance). When they stop paying, it is a default note and its value is greatly reduced. We typically pay between 20% and 50% of the fair market value (fair market value) of these notes. These are called distressed assets or toxic assets.
In case they start paying again, it is now a re-execution note, and after a year of payments, it can be sold for close to the price of a foreclosure note.
