What Is a Mortgage Note?
A mortgage note is a legal contract between a borrower and lender, laying out the repayment terms for a loan secured by real estate. It’s what binds the borrower to the debt and serves as a promise to repay, complete with interest rates, loan terms, and consequences for default. If you’ve ever taken out a mortgage, you’ve signed one—even if you didn’t pay much attention to it at the time.
Mortgage notes can be held long-term or sold to mortgage buyers, creating opportunities for liquidity. Whether you’re a homeowner, investor, or note holder looking to sell, understanding how these notes work is key to making smart financial decisions.
How Does a Mortgage Note Work?
When a borrower secures a mortgage, they sign two key documents: the mortgage (or deed of trust) and the mortgage note. The mortgage secures the loan with the property, while the note outlines the loan repayment terms. It typically includes:
- Loan amount – The original amount borrowed.
- Interest rate – The percentage charged on the outstanding balance.
- Payment schedule – Monthly, biweekly, or another agreed-upon schedule.
- Loan term – Typically 15, 20, or 30 years.
- Default terms – What happens if payments are missed.
Lenders hold the note and collect payments. However, many sell these notes to investors rather than waiting decades for repayment. Selling mortgage notes is common in the secondary market, where institutions, funds, and private investors purchase them as income-generating assets.
Types of Mortgage Notes
Mortgage notes aren’t one-size-fits-all. The type of note impacts its value and how it can be sold.
1. Performing Notes
These notes are current, with borrowers making timely payments. Investors prefer performing notes because they provide steady, predictable income with lower risk.
2. Non-Performing Notes
If a borrower has stopped making payments, the note becomes non-performing. These are riskier but can be bought at a discount. Investors often purchase non-performing notes with the intent to modify the loan, foreclose, or resell the property.
3. Private Mortgage Notes
When a property is sold through seller financing, the original owner acts as the lender. These notes, known as private mortgage notes, can also be sold, though they require more due diligence from buyers.
4. Institutional Mortgage Notes
Notes issued by banks or large financial institutions tend to be more standardized, making them easier to value and trade.
Why Sell a Mortgage Note?
Holding a mortgage note provides steady cash flow, but sometimes, selling is the better financial move. Some common reasons note holders sell include:
- Need for Immediate Cash – Selling converts future payments into a lump sum.
- Risk Management – Offloading the risk of borrower default or property depreciation.
- Simplifying Assets – Estate planning, divorce settlements, or business liquidations.
- Better Investment Opportunities – Using funds from the note sale to reinvest elsewhere.
Selling a Mortgage Note: What to Know
Selling mortgage notes isn’t complicated, but getting the best deal takes preparation. Here’s how it works:
1. Know the Value of Your Note
Not all mortgage notes sell for their full balance. Buyers consider:
- Borrower payment history – Consistent, on-time payments make a note more valuable.
- Interest rate – Higher interest rates increase the note’s worth.
- Loan-to-value (LTV) ratio – The lower the LTV, the safer the investment for buyers.
- Property condition and market value – A well-maintained home in a strong market attracts better offers.
2. Get Your Documents in Order
The smoother the transaction, the higher the offer. Buyers typically request:
- The original mortgage note
- Deed of trust or mortgage
- Payment records
- Property appraisal or valuation
3. Find the Right Buyer
Investors, hedge funds, banks, and private buyers all purchase mortgage notes, but not all offer the same terms. Shop around and compare offers.
4. Negotiate and Close the Deal
Most buyers won’t pay the full balance due to the risk involved, but strong payment history and favorable terms can improve your payout. Once a deal is agreed upon, the buyer will perform due diligence before finalizing the sale and transferring funds.
Final Thoughts
A mortgage note is more than just a piece of paper—it’s an asset that can be held for long-term income or sold for immediate cash. Whether you’re looking to offload risk, free up capital, or reinvest, selling a mortgage note can be a smart move. Just make sure you understand its value, gather your documents, and work with a reputable buyer to get the best deal possible.