Promissory Notes

Promissory Notes

A promissory note is a document that guarantees the payment of a specific amount of money, either on demand, or at a set time. These are usually signed at house closings, whether you are purchasing a new home, or refinancing, The issuer makes and unconditional promise to the payee. In accounting, this is referred to as a “note payable”. Notes usually include a principal amount, an interest rate, the name of the involved parties, terms of payment, and a maturity date. It should also include the date of the making of the note, the address to where payment should be sent, terms and conditions of penalties or payments before due dates, and late fees.

You should verify that everything on the promissory note is correct before signing. Confirm that the interest rate is what you were promised. Annual Percentage Rate (APR) is not the same as the mortgage interest rate. Figure out when your first payment is due. You should also find out if you can prepay your loan without penalty. If there is a prepayment penalty, you may want to think about looking for another lender. Lastly, find out if the loan is assumable, which means that someone can buy your property and take over your loan. If there is a “due on sale” clause in the note, it means that your loan is not assumable without the written permission from the lender. You should also understand that if you do not pay your mortgage payments on time, and become delinquent, your lender can take action by foreclosing on your property, garnishing your wages, or attaching your bank account or other assets. Talking to a title attorney is a good way to ensure that a promissory note is sound to your specifications.

Demand promissory notes do not carry a maturity date, rather, they are due when the lender demands payment. Promissory notes are instrumental for tax and record keeping. They are used in combination with mortgages in the financing of real estate transactions.

There are a few different common styles of repayment through banks. With amortized payments, you pay the same amount regularly (annually, monthly, ect). Some of the payment goes toward interest, but the rest goes to principal. There is also equal monthly and a final balloon style payment. This style of repayment requires the borrower to make payments of only interest for a few years while the principal does not decrease. At the end of the loan term, you make a balloon payment to repay the principal and remaining interest. This is useful style because of the low payments. If you have extra cash, you can sometimes prepay principal. Balloon payments can have risks, however. Although there are low payments, eventually you have to deal with the large balloon payment.

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