How a Mortgage Differs from a Promissory Note

Karl Watson: Difference Between a Mortgage & Note

Karl purchased a home in Oswego, Illinois on August 1, 2006. In order to finance the purchase, he went to Local Prairie Bank to obtain a home loan. The selling price for the home was $300,000. Karl had $60,000 saved as a down payment. Local Prairie Bank lent Karl $240,000 at 7% interest to be paid off over 30 years. At the real estate closing, Karl signed a promissory note. This note represented Karl's personal promise to repay the $240,000, and also set forth the terms of the loan. Karl also signed a mortgage.

The mortgage incorporated the terms of Karl's promissory note, and secured the value of the promissory note against the value of Karl's new home. This means that if Karl fails to make the scheduled loan payments, the bank can initiate foreclosure proceedings against Karl's house. The bank could also directly pursue Karl for the balance of the loan based on the terms of the promissory note. The seller, Sam, executed and delivered to Karl a general warranty deed, which vested title in the property in Karl. After the closing, the title company recorded the Sam-to-Karl deed with the Kendall County Recorder of Deeds.

Shortly thereafter, Local Prairie Bank recorded its mortgage with the Kendall County Recorder of Deeds. Local Prairie Bank's mortgage functions as a lien against Karl's property. If Karl attempts to re-sell his property to someone else, a title search will reveal that Local Prairie Bank has an outstanding mortgage on the property. This way, the public is on notice that Karl owns the property, and that the property is subject to Local Prairie Bank's lien interest. Once Karl pays off his loan, Local Prairie Bank, or the owner of the loan at that point in time, will record a release of mortgage with the Kendall County Recorder of Deeds. This document will release the mortgage lien on Karl's house. At all times after the closing, Karl is the title owner of his home.

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