Note
1031 Exchange
Absentee Landlord
Abstract of Title
Adjustable Rate Mortgage (ARM)
Adverse Possession
After Repair Value (ARV)
Amenity
Amortization
Appraisal
Appraised Value
Appraiser
Appreciation
APR
Assessed Value
Asset Protection
Bad Title
Balloon Mortgage
Bank Owned Property
Broker
Broker Price Opinion
BRRRR
Buy and Hold
Buyer’s Agent
Capital Expenditure
Capital Gains Tax
Capital Improvement
Capitalization Rate aka "Cap Rate"
Cash Flow
Cash On Cash Return (COCR or CRR)
Cash-Out Refinance
Cash Reserves
Certificate of Title
Certified Commercial Investment Member (CCIM)
Chain of Title
Clear Title
Closing
Closing Costs
Cloud on Title
Co-Borrower
Commercial Real Estate (CRE)
Comparative Market Analysis (CMA)
Consumer Price Index
Contingency Clause
Contract For Deed
Co-Tenancy Clause
Covenants, Conditions & Restrictions (CC&R)
Curb Appeal
Debt Service Ratio (DSCR)
Debt-to-Income Ratio (DTI)
Deed
Deed Book
Deed Of Trust (DOT)
Default
Deficiency Balance
Delinquent
Depreciation
Downturn
Dual Agency
Due On Sale Clause (DOS)
Earnest Money
Easement
Effective Gross Income
Egress
Ejectment
Eminent Domain
Equity
Equity Stripping
Escrow Agent
Escrow Agreement
Estate
Eviction
Fair Housing Act
Fair Market Rent (FMR)
Fair Market Value (FMV)
Federal Housing Administration (FHA)
Fee Simple
FHA Loan
First Mortgage
Fix and Flip
Fixed Price Purchase Option
Fixed Rate Mortgage
Forced Equity
Foreclosure
For Sale By Owner (FSBO)
Fractional Ownership
Freddie Mac
Gentrification
Gift Of Equity
Ginnie Mae (GNMA)
Graduated Lease
Gross Rent Multiplier (GRM)
Ground Lease
Hard Money Lender (HML)
Hard Money Loan
Hazard Insurance
HELOC
Holding Costs
Home Appraisal
Home Equity
Home Equity Loan
Home Inspection
Homeowners Association (HOA)
Home Warranty
House Hacking
Housing Starts
Individual Retirement Account (IRA)
Inflation
Ingress
Interest
Interest Only Loan (I/O)
Interim Interest
Internal Rate Of Return (IRR)
Intestate
Joint Tenancy
Joint Tenants
Joint Venture (JV)
Judicial Foreclosure
Jumbo Loan
Landlord
Land Trust
Land Value
Lease
Lease Option (L/O)
Lender
Lessee
Lessor
Leverage
Lien
Lien Waiver
Line Of Credit (LOC)
Listing
List Price
Live-in Flip
Loan Estimate
Loan Policy
Loan-To-Value (LTV)
Market Value
Maximum Allowable Offer (MAO)
Mortgage
Mortgage Broker
Multi-Family
Multiple Listing Service (MLS)
National Housing Act
Negative Equity
Net Operating Income (NOI)
Net Worth
No-Appraisal Refinancing
Note
Offer
Open House
Open Listing
Owner Occupied (OO)
Personal Use Property
PITI
Pocket Listing
Power Of Sale
Pre-Approval Letter
Private Mortgage Insurance
Probate
Proof Of Funds
Property Manager
Quiet Title
Quitclaim Deed
Real Estate
Real Estate Agent
Real Estate Broker
Real Estate Owned (REO)
Realtor
Recession
Refinance Rate
Refinancing
REIT
Rent To Own Homes (RTO)
Repair Costs
Reserve Fund
Residential Rental Property
Return On Investment (ROI)
Reverse Exchange
Reverse Mortgage
Rural Housing Service
Sales and Purchase Agreement
Security Deposit
Seller-Financed Sale
Seller-Paid Points
Shared Equity Finance Agreements
Short Refinance
Short Sale
Squatter
Sublease
Syndicate
Syndications
Tax Lien
Tenancy In Common
Tenants By Entirety
Tenement
Timeshare
Title
Title Commitment
Title Defect
Title Insurance
Title Search
Triple Net Lease (NNN)
Truth In Lending
Turnkey
Under Contract
Underwriter
Unsecured Loan
Use and Occupancy
Vacancy Rate
Voluntary Foreclosure
Waiver
Warranty Deed
Warranty Of Title
Workout Agreement
What Is a Mortgage Note?
A note is a financial obligation between a borrow and a creditor or investor — usually in the form of a loan. Like an IOU, this document will detail the terms of the loan, such as the principal amount, any interest charged, and repayment details.
A mortgage note is specific to a home loan and is secured by real property. It will detail the home buyer's required mortgage payments and assigned interest.
A mortgage note is specific to a home loan and is secured by real property. It will detail the home buyer's required mortgage payments and assigned interest.
- Types of Notes
- Different types of notes include:
- Mortgages
- Personal loans
- Treasury notes
- Structured notes
- Convertible notes
- Unsecured notes
- Bank notes
- Promissory notes.
Some of the most popular notes are Treasury notes (T-notes) and convertible notes. Investors can purchase T-notes, which obligate the U.S. government to pay a set interest payment every six months. On the note’s maturity date — when it becomes due in full — the government returns the principal investment to the investor.
A convertible note is a loan that can be converted to equity, and are commonly found in startups. When seed funds invest in the company, they might choose to have their investment convert into stock shares.
A convertible note is a loan that can be converted to equity, and are commonly found in startups. When seed funds invest in the company, they might choose to have their investment convert into stock shares.
What Are Promissory Notes?
Perhaps the most popular note of all is the promissory note, which is a legal document that says Party A owes Party B. This agreement lays out the deal terms, such as the amount and interest rate, and is signed by both parties: the issuer and the borrower. Unlike secured notes, promissory notes are not typically backed by collateral, although promissory notes might be secured with a deed-of-trust or mortgage during a real estate deal.
Investing in Notes
Investing in notes, including mortgage loans, involves buying the debt or loaning money, thus becoming the creditor. There are a few ways to invest in notes.
Peer-to-peer lending involves investors offering an unsecured loan to another person, either for debt consolidation or purchases. Essentially, the investor acts as a bank or lender. The borrower agrees to pay them back over a certain length of time with a certain interest rate.
Hard money loans give people looking to invest in a higher-risk property, like a fix-and-flip, access to needed financing. Many banks are uninterested in these types of loan, so hard money lenders can charge a higher interest rate due to the risk.
Seed or startup capital for young or growing companies can serve as a convertible note, providing eventual shares in exchange for initial funding.
Peer-to-peer lending involves investors offering an unsecured loan to another person, either for debt consolidation or purchases. Essentially, the investor acts as a bank or lender. The borrower agrees to pay them back over a certain length of time with a certain interest rate.
Hard money loans give people looking to invest in a higher-risk property, like a fix-and-flip, access to needed financing. Many banks are uninterested in these types of loan, so hard money lenders can charge a higher interest rate due to the risk.
Seed or startup capital for young or growing companies can serve as a convertible note, providing eventual shares in exchange for initial funding.
Investing in Mortgage Notes
Depending on the state, financed real estate is secured with either a mortgage or a deed-of-trust. These instruments outline the terms of the deal and explain the recourse if the debtor defaults. Investing in real estate notes is less hands-on than investing in physical properties. For example, note holders don't deal with tenants or handle repair issues — you only own the debt, not the property. However, if you have to foreclose on the property, you could end up taking ownership, and you might be able to recoup late payments and attorney fees.
Notes can be purchased on the secondary market. Notes that have been around for a long time — say, the mortgage is on year 15 of 30 — are considered “seasoned,” or performing, and have a steady track record of on-time payments. Some aren’t in such good standing, and note buyers can purchase these at a discount. Real estate investors can purchase notes via online marketplaces or note brokers.
Notes can be purchased on the secondary market. Notes that have been around for a long time — say, the mortgage is on year 15 of 30 — are considered “seasoned,” or performing, and have a steady track record of on-time payments. Some aren’t in such good standing, and note buyers can purchase these at a discount. Real estate investors can purchase notes via online marketplaces or note brokers.
Performing vs. Nonperforming Notes
Investing in notes is buying debt, which can be either performing or nonperforming. If the notes are nonperforming, the borrower is likely behind on their monthly payments or in default, so you may have to pursue foreclosure or collections — and the borrower's credit score is likely poor, so collecting the money owed may be difficult. Nonperforming notes are often sold at a discount. Investors that can navigate the collection or foreclosure process efficiently and effectively might target nonperforming loans.
A performing loan means the borrower is making their payments on time and the loan is not in default. With these, investors can purchase the notes and start receiving payments almost immediately.
A performing loan means the borrower is making their payments on time and the loan is not in default. With these, investors can purchase the notes and start receiving payments almost immediately.
Collateral vs. No-Collateral Notes
Notes can be backed by collateral (or “asset-backed”) or not. Ones that aren’t backed by collateral are considered unsecured. If an asset-backed loan like a mortgage goes into default, you can collect collateral — the real estate property. Unsecured notes, such as credit cards, have no recourse beyond collections.
Advantages and Disadvantages of Note Investing
With a note-based investment strategy, the investor enjoys the benefit of a steady stream of passive income — and notes can be sold or borrowed against. Unlike direct real estate investing, they do run the risk of default. Make sure to do your due diligence before purchasing nonperforming or no-collateral notes.
Mitigate this risk by investing in performing loans, which carry a track record of on-time payments. If it’s a mortgage, then the owner likely has a vested interest in the property, including built-up equity. The likelihood of the borrower continuing to make payments is positive.
Mitigate this risk by investing in performing loans, which carry a track record of on-time payments. If it’s a mortgage, then the owner likely has a vested interest in the property, including built-up equity. The likelihood of the borrower continuing to make payments is positive.
Alternatives to Investing in Notes
Instead of investing in notes, investors can get similar benefits by investing in mortgage-backed securities, which provide investors access to a pool of mortgages. Investors collect the principal and interest payments. There are also real estate investment trusts, which borrow money at short-rate terms and use it to buy long-term mortgage investments.