A promissory note is your personal promise to repay the loan. It spells out exactly what you owe, when payments are due, and what happens if you fall behind.
Key terms include the loan amount, interest rate, payment amount and due date, late fees, prepayment terms, default provisions, and the acceleration clause. Every single term matters because the note is a legally binding contract.
Read every term before you sign. The promissory note is one of the two core documents you sign at closing (alongside the deed of trust), and it defines your financial obligation.
Loan Terms
The note states the principal loan amount, the interest rate (fixed or adjustable), the loan term (typically 15 or 30 years), and whether the rate can change. For adjustable-rate mortgages, the note spells out how and when the rate adjusts, including index and margin details.
Payment Terms
Your monthly payment amount, due date, and where to send payments are all specified. The note also shows how payments are applied: first to interest, then to principal. It will indicate whether you have a grace period and how many days that lasts.
Late Fees
Most notes charge a late fee if payment is not received within the grace period, typically 4% to 6% of the payment amount. The note specifies the exact fee and when it kicks in. Missing a payment by one day generally does not trigger a late fee as long as you pay within the grace period.
Prepayment Terms
Some notes allow you to pay extra without penalty. Others charge a prepayment penalty if you pay off the loan early, usually within the first few years. Check whether your note has a prepayment penalty and how it is calculated before making extra payments.
Default Provisions
The note defines what constitutes a default, typically missing a payment or failing to maintain insurance. It also specifies the cure period, which gives you time to fix the default before the lender can accelerate the loan or foreclose.
Acceleration Clause
This clause allows the lender to demand the entire remaining balance if you default. Without it, the lender would have to sue for each missed payment individually. The acceleration clause is standard but the specific triggers and conditions are spelled out in the note.
Maturity Date
The note states the final payment date. For a 30-year loan, this is 30 years from the date of the note. If you have a balloon payment, the note will specify the balloon amount and when it is due.
Review Before Signing
Ask your lender to explain every term you do not understand. The promissory note is a binding contract, and once signed, you are obligated to meet its terms. I review the note with every client at closing to make sure they understand exactly what they are agreeing to.