One of the things that I try to explain to borrowers at closing is that the most important document they sign for the lender is the promissory note. The promissory note is the borrower’s written promise to pay the loan back to the lender at a certain rate for a certain term. The note details the amount of the loan, the interest rate and the duration of the loan payments. It also states that the borrower agrees to execute a mortgage as evidence of the debt due to the lender. The mortgage is the security instrument for the repayment of the debt.
If payment is not made according to the borrower’s promise, or to the terms of the note the lender has the right to foreclose on the property secured by the mortgage. That is the lender’s remedy for nonpayment or default. Although the mortgage provides security for the repayment, it is the note that must be paid each month, technically, not the mortgage. So when someone says that they are making their mortgage payment, they are actually making a payment on the note, not the mortgage.
In fact the mortgage seldom makes reference to the rate and term of the payment; it instead refers to payment due under a note signed by the borrower. When the borrower signs the mortgage they covenant, or promise, to pay the lender under the terms of the note, they also covenant to keep the property insured, to pay the property taxes, to keep the property in good condition and to pay off the mortgage upon the sale. A breach of any of those covenants gives right to the lender to foreclose on the mortgage, sell the property and settle the debt.
So next time someone says they are making a mortgage payment, know that they really mean they are making a payment on their promissory note.