The word “Mortgage” is commonly misused to mean the amount borrowed, and owed on real estate. Mortgages, however, are only part of the equation when accurately referring to debt on real estate and the resulting calculation of equity. The Note and Mortgage are two separate documents. The Note is the IOU to the lender, usually a bank, which states who borrowed the money, how much was borrowed and the terms of repayment (including the interest rate, late charges and what happens if the IOU isn’t paid on time.) The Note is signed by the borrowers and kept by the lender. Notes are sometimes transferred to other lenders in exchange for cash or credit, as they are assets that can be sold. Notes are private documents that they are not recorded at the Registry of Deeds. Once the IOU is repaid, the original signed Note should be returned to you marked “PAID” to confirm that the debt is no longer outstanding and to prevent anyone from seeking repayment from you. Notes can be used to evidence any loan, not just ones related to real estate.
The Mortgage is a separate notarized document that lenders require simultaneously with the Note to provide security for repayment of the Note. Security means leverage in the event that the borrower fails to pay the Note; it allows the lender to collect the unpaid amount by selling the real estate and keeping enough of the sale proceeds to repay the balance owed. Mortgages are public documents specific to real estate and are recorded at the Registry of Deeds so that anyone can see whether there is a lien on any identified parcel of real estate. The Mortgage describes the lender’s right to foreclose on your real estate if you fail to pay the amount due.
When you borrow money to purchase real estate the lender requires that you sign a Note, which evidences the loan, and a Mortgage showing the lien on the property. When you sell the real estate the funds from the sale are used to pay off the remaining amount due on the Note, and the Mortgage is discharged, which means that a document generated by the lender states that the obligation has been repaid and the Mortgage which secured its payment is released. Mortgage Discharges are recorded at the same Registry of Deeds as the Mortgage, and serve to cancel, or discharge, the Mortgage, eliminating the lien.
To be precise, we should say: “Did you pay the Note this month?”, “How much is left on the Note”, and “Let’s refinance the Note”, but language has a way of becoming imprecise, so most use the word Mortgage instead. Whatever!
Please look for future blogs on defining equity in real estate and other interesting topics.
Hindell S. Grossman, Esq.
Grossman & Associates, Ltd.