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What is a Promissory Note?
What is a promissory note? Learn the definition, what's inside one, secured vs. unsecured notes, how it differs from a mortgage, & more.
7 min read
A promissory note is a written promise to repay money — the document that actually creates a debt. In real estate, it’s the piece of paper that makes a borrower legally obligated to repay a home loan, and it’s the core asset that note investors buy and sell. This guide explains what a promissory note is, what’s inside one, how secured and unsecured notes differ, how it relates to a mortgage, and how these notes are traded.
Key Takeaways
- A promissory note is a written, legally binding promise by a borrower to repay a set sum under defined terms.
- It names two parties: the maker (borrower) and the payee (lender).
- The note creates the debt; a mortgage or deed of trust secures it to property. A mortgage note is a promissory note secured by real estate.
- Notes are secured (backed by collateral) or unsecured (backed only by the promise to repay).
- A promissory note is generally a negotiable instrument — it can be bought and sold on the secondary market.
What Is a Promissory Note?
In plain terms, the promissory note is the debt itself. Whenever money is loaned under formal terms — a home loan, seller financing, a private loan — a promissory note records the promise to pay it back. In real estate, this is the document note investors are really buying when they buy a “note.”
What’s Inside a Promissory Note?
Most promissory notes share the same core elements:
- Parties: the maker (borrower) and the payee (lender or note holder).
- Principal: the amount borrowed.
- Interest rate: the rate charged on the balance.
- Payment terms: the payment amount, schedule, and due dates.
- Maturity date: when the loan must be paid in full, including any balloon.
- Default provisions: late fees, acceleration, and remedies if payments stop.
Promissory Note vs. Mortgage: What’s the Difference?
These are two different documents doing two different jobs. The note creates the debt; the mortgage secures it.
| Document | What It Does |
|---|---|
| Promissory note | The borrower’s promise to repay — sets the amount, rate, and terms |
| Mortgage / deed of trust | Secures the note to the property and enables foreclosure on default |
Put simply, a mortgage note is a promissory note secured by real estate. For more, see what is a mortgage note and the difference between a mortgage and a note.
Secured vs. Unsecured Promissory Note
Promissory notes come in two broad flavors based on whether collateral backs them:
- Secured promissory note: backed by collateral — in real estate, the property, pledged through a mortgage or deed of trust. If the borrower defaults, the lender can pursue the collateral.
- Unsecured promissory note: no collateral; the lender relies solely on the borrower’s promise to repay, which is generally riskier.
Note investors overwhelmingly focus on secured real estate notes, because the property provides a tangible recovery path if the borrower stops paying.
How Do Promissory Notes Work in Real Estate?
When someone finances a property, they sign a promissory note (the promise to repay) alongside a security instrument (a mortgage or deed of trust) that pledges the property as collateral. The lender can hold that note and collect payments — or sell it. Because the note is transferable, a thriving secondary market exists where investors buy notes, step into the lender’s role, and collect the borrower’s payments, usually through a licensed servicer.
Can You Buy and Sell Promissory Notes?
Yes. A promissory note is generally a negotiable instrument, meaning the right to receive its payments can be transferred or sold. Real-estate-secured promissory notes trade on the secondary market, usually at a discount to the unpaid balance, and the new holder collects the payments going forward. If you hold a note and want cash now, see how to sell a mortgage note; if you want to invest, browse notes on the Paperstac marketplace and always run due diligence first.
Promissory Note Glossary
- Promissory Note
- A written, legally binding promise by one party to repay a specific sum of money to another under defined terms.
- Maker
- The borrower who signs the promissory note and promises to repay the debt.
- Payee
- The lender or party entitled to receive the payments under the note.
- Secured Promissory Note
- A note backed by collateral, such as real estate pledged through a mortgage or deed of trust.
- Unsecured Promissory Note
- A note not backed by collateral, relying only on the borrower’s promise to repay.
- Negotiable Instrument
- A signed document promising payment that can be transferred or sold to another party.
Frequently Asked Questions
What is a promissory note?
A promissory note is a written, legally binding promise by one party (the maker or borrower) to repay a specific sum of money to another party (the payee or lender) under defined terms, including the amount, interest rate, payment schedule, and what happens on default. In real estate, the promissory note is the document that creates the debt behind a home loan.
What is the difference between a promissory note and a mortgage?
The promissory note is the borrower’s promise to repay the loan, while the mortgage (or deed of trust) is the document that secures that promise to the property as collateral. The note creates the debt; the mortgage gives the lender the right to foreclose if the debt isn’t paid. A mortgage note is a promissory note secured by real estate.
What are the main parts of a promissory note?
A promissory note typically includes the parties (maker and payee), the principal amount borrowed, the interest rate, the payment schedule and due dates, the maturity date, and the default provisions describing what happens if payments are missed. Secured notes also reference the collateral and security instrument.
What is the difference between a secured and unsecured promissory note?
A secured promissory note is backed by collateral — for example, real estate pledged through a mortgage or deed of trust — so the lender can pursue the collateral on default. An unsecured promissory note has no collateral and relies only on the borrower’s promise to repay, which generally makes it riskier for the lender.
Can you buy or sell a promissory note?
Yes. A promissory note is generally a negotiable instrument, meaning the right to receive its payments can be transferred or sold to another party. Real-estate-secured promissory notes are bought and sold on the secondary market, often at a discount, and the holder collects the borrower’s payments.
Is a promissory note legally binding?
Yes. A properly executed promissory note is a legally binding contract that obligates the borrower to repay under the stated terms. To be enforceable it should be in writing, signed, and include the essential terms. Because requirements vary, it’s wise to have significant notes prepared or reviewed by a qualified attorney.