Secured Promissory Note

Secured promissory note summary: 

• A secured promissory note is a written promise by a borrower to repay a lender. 

• In the world of consumer debt, you’re most likely to use a secured promissory note when signing up for a home mortgage. 

• The secured promissory note on a mortgage usually includes details like down payment amount, mortgage payment due dates, and what happens if payments are late. 

Secured Promissory Note Definition and Meaning

A secured promissory note is a legal document between a borrower and lender in which the borrower makes a written promise to repay the lender for a certain amount of money in a secured loan. It also includes a description of the collateral (something valuable, such as property) that secures the loan. 

For consumer debts, a secured promissory note is often used in home mortgage loans. This type of secured promissory note is also called a mortgage note. 

A secured promissory note is different from unsecured promissory notes due to the security—collateral—involved. Along with a promise to repay the lender, a secured promissory note gives the lender permission to take ownership of the listed collateral if the debt isn’t repaid. 

Offering something of value as collateral helps reduce the lender’s risk, giving them security that the loan will be repaid. (Some unsecured debts may also use promissory notes, but their details will be different because those debts don't involve collateral.) 

Signing a secured promissory note is part of the official process of buying a home with a mortgage loan. It gives the mortgage lender legal protection and permission to foreclose on the home in case of default of the loan. A secured promissory note is typically kept by the lender until the loan is paid off.

Key Features of a Secured Promissory Note 

Secured promissory notes generally have this information: 

• The borrower’s name and address 

• The lender’s name and address 

• Loan maturity date 

• Amount of money borrowed 

• Loan payment schedule

• Loan interest rate (with details on how interest is calculated) 

• Process for prepayments (including mention of any prepayment penalty) 

• Amount of interest or other fees charged for overdue payments

• What happens in case of default

• Governing law, amendments, and waivers for the promissory note

When you get a home mortgage, the mortgage’s secured promissory note will usually include other features and details, such as: 

• Down payment amount 

• Mortgage term (how long it will take to pay off the loan) 

• How your mortgage interest rate can change in the future, in case you are using an adjustable-rate mortgage (ARM) 

• Where to send your mortgage payments 

The secured promissory note for a mortgage might also have a section stating that the borrower is expected to live in the home as the borrower’s primary residence. Make sure there are no misunderstandings with your mortgage company if you want to use a home as a rental property.