What Is a Promissory Note?

In real estate, a promissory note is one of the important documents you have to make if you finance a property through a bank. Also called a mortgage note, borrower’s note, or a real estate lien note, it is secured by a specified mortgage loan.

Basically, this type of financial medium holds an unconditional written and signed promise to pay a specific amount of money—which in some cases includes interest—on a specific date or on demand. The person who is making the promise is the “maker”, and the one who is entitled to receive payment is the “payee”. The former is required to sign the note, while the latter isn’t.

There’s also a case where a promissory note is negotiable, where the payee can negotiate it with another party who will then become the “holder” and is entitled the payment. For example, if you have taken out a loan on a promissory note to purchase a house that you want, your bank may sell the note to another bank, which will become the holder.

Similar to bonds, this note is associated with specific risks. However, it also has a specific advantage over other investments, such as the fact that there are no fees taken out of it.

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