Financing Instruments
I: Notes And Mortgages
The purchase of real estate can usually be regarded as a joint venture between an equity investor and a lending institution.
Very few occasions arise where properties are bought for all cash. In most real estate transactions a lender provides a part of the financing, and the property is held as security for the debt.
There are two instruments involved when a real estate transaction involves both debt and equity - the note and the mortgage.
A. Promissory note
A promissory note is a signed document acknowledging the existence of a debt and promising repayment. The chief function of the note is to make the borrower personally liable for payment of the debt.
Once an individual has signed such a note, the ten of the repayment schedule must be met regardless of the financial success of the property.
B. Mortgage
A mortgage is a pledge of security for the repayment of a debt. It is created by formal written agreement in which the person who signs a promissory note pledges the property being financed as security (or collateral) for the debt. Therefore, the mortgage itself is a lien - not evidence of a debt.
