At its most basic, a mortgage note is a type of promissory note that details the payment obligations of a borrower to a lender. In a mortgage note (which often referred to simply as ‘note’), a borrower promises to repay their debt to a lender. The note often contains an outline that details who borrowed from whom, how much was borrowed, what the interest rate is, a specific timeline of payments, and consequences of non-payment. Mortgage notes in New York City are not usually matters of public record; that being said, they are legally enforceable documents that can be used to uphold the financial agreements between two parties. This document can usually be sold in secondary markets, with mortgage notes for sale being a sought-after investment for investors.
Meanwhile, a mortgage loan is a separate document that details the different responsibilities and collaterals of each party. Basically, a mortgage outlines the financial responsibilities of both the lender and the borrower, specific situations that could qualify as a breach of their agreement, and what particular property the mortgage is related to. In short, a mortgage loan is a reminder that the lender can (and most often will) seize a borrower’s home should the borrower not be able to make repayments.
Both documents, though similar, are actually separate entities and should be treated as such. While the borrower will often have a copy of their mortgage note, the original document is usually held by the lender as a security instrument.
Different Types of Mortgage Notes
The nature or type of mortgage note that a home buyer or investor has is dependent on the type of mortgage loan that they have. Because there are dozens of different loan types out there, mortgage notes are also just as varied. That being said, there are three, common loan types that millions of Americans are availing at the moment.
One of the most common type of mortgage note is the secured loan. In a secured loan, a loan from a lender is secured by using assets –such as the real estate in question –as collateral. This means that, while the lender can seize a person’s property in the event of non-payment, a secured loan mortgage note has relatively lower interest rates and longer payment terms as compared to other mortgage loans. This is preferred by both borrowers and lenders because the mortgage note often provides the borrower with better, easier payment schemes while the lender takes on a significantly lower financial risk.
Meanwhile, an institutional loan is what we can consider a ‘traditional’ loan from a mortgage lender or other financial institution. This type of loan is usually heavily regulated by both State and Federal governments, with strict interest rates and payment terms being enforced for both borrower and lender. In New York city, mortgage notes often come from institutional loans and are often preferred by investors looking to purchase a second home because the mortgage note from this loan provides more leeway in terms of committing to a set interest rate and payment plan while lenders can rest assured that they have legal backup when seeking loan repayments from borrowers.
Over the past decade or so, however, another type of mortgage note is becoming increasingly popular: the private loan. In a private loan, the owner of the property in question is also the loan lender, so they’re able to set up the mortgage note however which way they want. This is the riskiest type of loan as it is not as regulated as the other two, but it is much more customized to each individual buyer.
Why You Should Invest in Mortgage Notes
Mortgage notes are sold on the secondary market for a number of reasons, but the most common being that the original loan lender needs a lump sum payment immediately. Because they, too, must adhere to the terms and conditions set on the mortgage note, a lender will simply sell it off to an investor, with the borrower usually unaffected by this change.
Mortgage notes are attractive assets for investors because they are relatively low risk investments. Thanks to a robust economy despite the pandemic of 2020, Americans are defaulting on their mortgage payments less and less, meaning that a person who owns a mortgage note is assured of income through regular payments. Borrowers are also motivated to continue their loan repayments because they don’t want to lose their house.
Because of this, investors who invest in mortgage notes are often secured from financial loss, especially because they are backed-up by a legally enforceable document that gives them rights over a piece of property should repayment not be made.
Most of the profit that an investor makes from investing in a mortgage note will come from the loan’s particular interest rates. Because the interest rates are often set in stone, this assures a steady, revenue stream that’s backed up by a real asset like property.
Invest on Mortgage Notes Through Us
Yes, mortgage notes are a great investment, but only if you know what you’re doing. Here at Melanin Homes, we have decades of experience under our belt. We have extensive knowledge of the real estate business including how to buy mortgage notes for sale. As one of the leading real estate experts in New York, we have the necessary tools and networks to help you navigate the ins-and-outs of the New York real estate market and legal system. Whether you’re a local New Yorker or an Out of State investor, we have the resources to help you find the right real estate investment. Contact us, today, to learn more!