Promissory Note & Mortgage | Real Estate Exam

Summary

In this video, Paul Vojchehoske from Real Estate Classroom explains the promissory note and the mortgage, two critical yet often misunderstood concepts in real estate. He likens them to car loans, clarifying that a promissory note is a loan document outlining repayment terms, while a mortgage pledges property as collateral for the loan. Paul also defines key terms like mortgagor, mortgagee, hypothecation, and various clauses in mortgage agreements. He emphasizes understanding these fundamentals before moving on to the deed of trust in the next video.

Takeaways

• 📜 The promissory note and mortgage are two separate legal instruments used in financing real estate.
• 🚗 The process of borrowing money for a car helps to conceptualize the process of a promissory note and mortgage.
• 💼 A promissory note is a document where the borrower promises to repay a debt over a specified period at a certain interest rate.
• 🏦 The bank requires the title to a vehicle or a mortgage as collateral for the loan to ensure they can repossess in case of default.
• 🏠 A mortgage is a legal document that pledges real property as security for the loan in case the borrower defaults.
• 👤 The mortgagor is the borrower who retains legal title to the property, while the mortgagee (lender) has a lien against it.
• 📝 Key terms in a promissory note include the amount borrowed, interest rate, monthly payments, prepayment penalty, and default consequences.
• 📑 Mortgages contain clauses like defeasance (loan paid in full), alienation/due-on-sale, and acceleration (entire sum due upon default).
• 💡 Hypothecation is the legal doctrine that allows pledging property as collateral without giving up the right to possess and use it.
• 📈 The mortgage crisis of 2008-2011 highlighted the importance of the assignment of rents clause, allowing banks to collect rent directly from tenants in case of landlord bankruptcy.
• 🏛 In mortgage states like Iowa, foreclosure must be a judicial process, occurring in court, unlike non-judicial foreclosures in deed of trust states.

Q & A

What are the three legal instruments discussed in the video?

The three legal instruments discussed in the video are the promissory note, the mortgage, and the deed of trust.

What is a promissory note?

A promissory note is a loan document where the borrower, or mortgagor, promises to repay a debt over a specified period at a certain interest rate.

How is a promissory note different from a mortgage?

A promissory note is a promise to repay a loan, while a mortgage is a legal document that pledges real property as collateral for the loan in case of default.

What is the role of the title to a vehicle in a loan?

The title to a vehicle serves as collateral for a loan, giving the bank the right to repossess the vehicle if payments are not made.

What is meant by the term 'mortgagor'?

The mortgagor is the borrower who enters into the mortgage agreement, promising to repay the loan.

What is meant by the term 'mortgagee'?

The mortgagee is the lender, such as a bank, who provides the loan and holds the mortgage as security.

What is the purpose of a defeasance clause in a mortgage?

A defeasance clause states that the mortgage, which places a lien on the property, is defeated or no longer valid when the promissory note is paid in full.

What is an acceleration clause in a mortgage?

An acceleration clause allows the lender to demand immediate repayment of the entire loan balance upon the borrower's default.

What is the significance of an assignment of rents clause in a mortgage?

An assignment of rents clause gives the lender the right to collect rent directly from tenants if the property is used as collateral and the borrower defaults.

What is a satisfaction piece in the context of a mortgage?

A satisfaction piece, also known as a mortgage release, is the document provided by the lender to the borrower as proof that the mortgage loan has been paid in full.

What is the difference between judicial and non-judicial foreclosure?

Judicial foreclosure requires the foreclosure process to go through the court system with a judge's involvement, while non-judicial foreclosure allows the lender to proceed without a court order, typically through a trustee sale.