A relative or friend might lend you money based on your promise to repay, but mortgage lenders require much more than your word. In the mortgage lending industry, a note acts as the official IOU between borrower and lender. Known as the promissory note, it is separate and distinct from the mortgage document.
Promise to Repay
The terms "mortgage" and "note" are casually, but erroneously, used interchangeably. A mortgage document, or in some states a deed of trust, pledges the home as collateral for the loan's repayment. A note, however, is a promise to repay -- evidence of a contract to borrow a certain amount of money, under certain terms, from the lender.
Holding the Note
The lender holds onto the note until you pay off the home loan. For example, if you repay the home after 15 or 30 years, the lender marks the note as paid. In general, you also pay off the loan when you sell or refinance your home. If your lender sells the mortgage or trust deed to another lender, the loan and note also transfer to the new lender, who takes responsibility for enforcing it. Unlike a mortgage or deed of trust, the note isn't recorded at your county land records office.