A promissory note is a legal document which you, the borrower, officially agree to repay a specific amount of money to a lender under agreed-upon terms. It outlines the key aspects of a loan, including the principal, interest rate, payment schedule, and the consequences of borrower default.

Although it’s easy to confuse it with a mortgage or deed of trust, they serve different purposes: the promissory note is the borrower’s personal promise to repay, while a mortgage or deed of trust is the security device that allows the lender to foreclose if the borrower defaults. In simple terms, the note is your promise to pay, and the mortgage secures that promise with the property as collateral.

Your promissory note isn’t just a document—it’s the outline of your loan terms. Read it carefully before it catches you off guard.

1. Know Where It Is. And Read It! It sounds simple, but most borrowers can’t locate their promissory note—let alone recall what’s inside. This document outlines the terms of your loan, so keep it accessible and take the time to review it.

2. Understand the Fixed Rate Period If you have a hybrid or adjustable-rate loan, your note likely includes a fixed-rate period—typically 3, 5, or 10 years—before the rate adjusts. Know when it changes and what that means for your monthly payments.

3. Watch for Balloon Payments. Your note may include a balloon clause, where a large lump sum is due at maturity. If you’re not prepared to refinance or pay it off, this can become a significant risk, since your loan could go into foreclosure if you’re unable to pay off the loan.

4. Prepayment Penalties Some loans penalize you for paying them off early. Review the note to see if there’s a lockout period, step-down penalty, or yield maintenance clause before making early payoff decisions.

5. Is Your Note Assignable? Can the loan be transferred? Some notes allow the lender or borrower to assign the note, impacting estate planning or ownership structure changes. Understand your rights—and the lender’s. A good assumable loan can add value to your property, as a buyer may be able to assume lower debt service payments in a high-interest environment.

6. DSCR Covenants (for Commercial Loans) Commercial notes often include Debt Service Coverage Ratio (DSCR) requirements. Falling below the threshold—even if you’re making payments—could breach your agreement.

7. Know When the Interest-Only Period Ends Some loans begin with an interest-only period—usually 1–10 years—before switching to fully amortizing payments. That means your monthly payment could jump significantly. Understand when the interest-only period ends, what your new payment will be, and whether you’ll need to refinance or adjust your cash flow accordingly.

Your promissory note is one of the most important documents you sign—don’t overlook it. Understanding what’s inside protects your investment and helps you plan ahead. Contact me if you’d like assistance reviewing your note and preparing for the challenges and opportunities specific to your situation.