Because a mortgage note is a security instrument, it can be bought and sold on the secondary mortgage market. Therefore, mortgage lenders sometimes sell mortgage notes to real estate investors who are attracted to these relatively risk-free investments and the potential to earn passive income. Because lending institutions sell mortgage notes, real estate investors technically own a mortgaged property. These investments are low-risk, because the only way investors will lose money is if a borrower defaults on their loan or avoids paying interest by prepaying their mortgage. Even in the latter situation they may not lose money – but also wouldn’t make much money because they wouldn’t be earning interest. Regardless of who holds the mortgage note, the borrower is obligated to follow the terms of the mortgage. The borrower won’t be affected by any change in who holds the note because the payments will consistently be made to a third-party entity throughout the life of their loan.
The borrower won’t have the original copy of their mortgage note until they’ve paid off their loan. At closing, the borrower will receive a copy of the mortgage note.
This is part of the legal process and helps the borrower to understand what their responsibility is in paying back a loan. Once they’ve paid off the entirety of the loan, they’ll receive the deed to their home.
What If The Borrower Defaults?
Real estate investors want people to pay off their mortgages in the time allotted because it yields the highest return on their investment. Therefore, they don’t want borrowers to default on their loan or pay off the loan before the end of the term.
If a buyer defaults on a loan or fails to adhere to the terms of the mortgage, the real estate investor can begin the foreclosure process. In most states, when a real estate investor starts the foreclosure process, it’s called a judicial foreclosure.
The party pursuing the foreclosure must produce the note to prevail. In deed of trust states, a trustee becomes legal owner of the property, and the trustee brings a nonjudicial foreclosure in case of default.
What If The Borrower Prepays?
If a borrower makes early payments in addition to their monthly payments, they may have to pay penalties. These penalties can vary among states. People choose to prepay so that they can pay off their mortgage early or make lower interest payments.
Be sure to investigate your state and local laws to understand if there are laws prohibiting loan prepayment penalties. It may not make financial sense to make early payments or prepay your mortgage.
What If The Borrower Pays Off The Mortgage In Full?
When a borrower pays off a mortgage, the note holder gives the note to the borrower. This means that the home is theirs, free and clear.
If a borrower refinances a mortgage, the new mortgage pays off the original lender and a new note is created, to be held by that lender until the new mortgage is paid in full. In the event of a refinance, the borrower will not have the note or deed to the home.
Instead, they’ll continue to make payments to a third party, and the lender can sell the mortgage note on a secondary market. In this event, real estate investors will still own the mortgage note until the borrower pays off their mortgage.
