Most homes and condos in South Florida are purchased with the help of a home loan, or mortgage. Buyers find a property they want to purchase, and then they get a loan from their bank or mortgage lender to help pay the seller the negotiated price. For most Floridians, having a mortgage goes hand in hand with the American Dream of home ownership.
Of course, included in the home loan documentation is the promissory note, the agreement where the buyer agrees to repay the lender the money he or she borrows to finance the transaction. If all goes well at the closing table, the buyer pays the seller the sales price using the loan proceeds and he or she signs the loan documents, including the promissory note.
10 Things To Know About Your Promissory Note Before Closing on Your Home Loan
Nowadays, closings can be confusing. For one thing, federal law requires that a borrower receive several new documents (for details, read our earlier post on what’s involved at a closing). One of the most important documents at closing for the buyer to understand is the Promissory Note. Because things can get confusing, below are ten essential terms that appear in most promissory notes that a Florida home buyer should understand before coming to the closing table:
1. What is a Promissory Note?
A promissory note (Note) is a written agreement between a lender and a borrower. It is a financial contract between the parties, where the borrower agrees to pay a specific sum to the lender according to specific terms.
It is also a negotiable instrument, which means the lender can sell it to another party. (Selling promissory notes related to sub-prime mortgages was a big part of the Foreclosure Crisis, for details on that read our Ebook here.)
In many instances, notes are sold at or immediately after a real estate closing, requiring the borrower to make payments to a completely unrelated lender.
2. Who are the Parties to the Promissory Note?
The promissory note will identify these parties at the top of the document, usually within the first few sentences or paragraphs. Their mailing addresses will also be given. The parties to the Promissory Note are the “Maker” and the “Payee.”
The Maker is the one promising to pay (borrower). The Payee is the one being paid (lender).
3. The Principal Sum
This is the amount being borrowed to help purchase the home or condo, and that amount is specifically stated in the the Note. In the paragraph where the borrower promises to pay the lender the principal sum it will also state that the money shall be repaid in lawful money of the United States along with interest at the rate and terms described in the Note.
The Promissory Note will also set out the details on the interest the borrower has to pay the lender to borrow the money. Interest is the agreed-upon sum being paid by the borrower for the use of the lender’s money. The amount of interest that can be charged is governed by federal and state law: In Florida, there is a maximum legal rate of interest set by statute. If the interest rate is higher than the statutory rate, it is called “usurious” and which is illegal.
In a fixed rate note, as long as payments are being made on time and without a problem, then the Promissory Note’s interest rate will not change. However, if there is a default on the note, then the Promissory Note will likely have language that allows for late fees and for a jump in the interest rate, to the maximum legal rate allowed by law (sometimes called the “default rate”).
5. Accrued Interest
Accrued interest is the number you get when you multiply the Promissory Note’s set interest rate with the number of days in each accrual period, say 30 days, with the unpaid principal balance outstanding on the Promissory Note and then you divide that result by 365 days.
This calculation is used to figure out how much the borrower will pay each month in interest in their monthly payment to the lender (assuming the loan is a amortizing loan or an interest only loan).
Most Promissory Notes have a provision that allows the borrower to pay off the debt early without any extra premium payment or any penalty. A Prepayment can be the total of the unpaid principal sum and the unpaid accrued interest as of the date of prepayment.
(Please note, a partial payment is different from a prepayment. A partial payment is usually a payment made by a borrower for an amount which is less that what is currently owed (for example, if the monthly payment is $100, and the borrower only pays $60 by the stated due date, then the borrower has made a partial payment, which can lead to a default under the terms of the promissory note). A prepayment is where the borrower pays money to the lender before its stated due date.)
Most real estate related promissory notes are backed by some type of security. Both the land and everything upon and attached to it (buildings, swimming pool, other improvements) act as collateral for the repayment of the note. The security for the repayment of nearly every home loan in Florida is a Mortgage (which is a different document altogether).
The Promissory Note will have language that explains what breaking the bargain, or breaching the contract, involves. If the borrower fails to make a payment under the terms of the deal, then he or she will be considered “in default.” The lender can then take the described steps in response, which is usually accelerating the Promissory Note and declaring it immediately due and payable in full.
9. Grace Period
The Promissory Note will have some breathing room for the borrower if he or she fails to fulfill their obligations under the note. This is called the “grace period.”
Here, the lender isn’t allowed to exercise his remedies after a “default” until a certain amount of time has passed, usually 10 calendar days, after, for example, an installment payment is due.
There may be a limit on the number of times the grace period can be applied during a single year (e.g., two).
The Note will have stated remedies, or protections for the lender, in the event of a default. These remedies include late fees, a demand to be paid in full (acceleration of the debt), and reimbursement for all collection costs as well as reasonable attorneys’ fees and court costs (costs of lawsuit).
Having a Florida Real Estate Lawyer for Your Residential Closing
A good piece of advice when you and your family are purchasing or selling your family home in one of the biggest transactions of your life is to at least talk with a Florida real estate lawyer. Getting someone to review all of the paperwork including the all important promissory note, isn’t as costly as most of us think it is. And it’s always a lot cheaper than paying to fix a problem after a closing occurs. Most real estate lawyers, like Larry Tolchinsky, offer a free initial consultation (over the phone or in person, whichever you prefer) to answer your questions.
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