A promissory note is a legally binding document that outlines the terms of a loan between a borrower and a lender. In the context of a mortgage, it serves as a formal promise to repay borrowed funds used to purchase property. Below are three practical examples of a promissory note for a mortgage, each tailored to different scenarios.
In this scenario, a borrower is obtaining a fixed-rate mortgage to purchase their first home. This type of mortgage means that the interest rate remains the same throughout the loan term, providing stability in monthly payments.
The borrower, Jane Doe, agrees to borrow $250,000 from XYZ Bank at a 4% interest rate over a 30-year term.
“I, Jane Doe, promise to pay \(250,000 to XYZ Bank at an interest rate of 4% per annum. The loan will be repaid in monthly installments of \)1,193.54 for 30 years, beginning on January 1, 2023. I understand that if I fail to make any payment when due, the lender may declare the entire balance immediately due and payable.”
Notes:
In this case, the borrower opts for an adjustable-rate mortgage, which initially offers a lower interest rate that can fluctuate over time based on market conditions. This option is often chosen by borrowers who plan to sell or refinance before the rate adjusts.
The borrower, John Smith, secures a $300,000 loan from ABC Credit Union with an initial interest rate of 3% for the first five years, after which it adjusts annually based on the LIBOR index.
“I, John Smith, hereby promise to pay ABC Credit Union the principal sum of $300,000, with an initial interest rate of 3% per annum for the first five years. After this initial period, the interest rate will adjust annually based on the LIBOR rate plus a margin of 2%. Payments will be made monthly, starting on March 1, 2023. Should I fail to comply with any payment terms, the lender may declare the loan in default.”
Notes:
In this scenario, the borrower chooses a balloon mortgage, which features lower monthly payments for a set period, followed by a large final payment (the