Notes and Security
When a homebuyer borrows money to purchase a home, he signs a promissory note. The promissory note is his promise to pay back the money he borrowed, plus interest, over a specific period of time and at regular intervals (usually monthly and most often on the first of each month). The repayment plan requires the interest be paid up front. This is why the initial loan payments are mostly applied to interest with very little being paid on the principal.
To guarantee the loan (and to assure the lender that it will be repaid), the homebuyer offers security for the money he borrows. This security is the actual property he is buying. The promissory note is simply an IOU.
The note is one of the most important documents signed when purchasing property with borrowed money. It's what creates the legal obligation on the borrower's part to pay back the money she has borrowed plus interest.
The original note is retained by the lender. The borrower receives a copy of the note at the time of settlement. The original is returned to the borrower, marked paid, when all the money borrowed plus interest has been paid back.
Legally speaking, over the years other terms have been used to describe the parties involved with a note. Common terms are:
Promisor — The promisor is the person who makes a promise. With a promissory note, the promisor is the person promising to repay the loan (in other words the borrower).
Promisee — The promisee is the person to whom a promise is made. With a promissory note, the promisee is the person who receives the payments for the loan (the lender).
Obligor — The obligor is the person who binds herself to another by a contract or legal agreement. This is another word for promisor or borrower.
Obligee — The obligee is the person to whom another is bound by a contract or legal agreement. This is another word for promisee or lender.
Depending on the locale, any one of these terms might be used to describe the parties of a promissory note.
A promissory note is typically known as an unsecured obligation. This means should the borrower declare bankruptcy, the debt secured by the note is repaid only after all the other debts to secured creditors have been paid. When lending money to purchase real estate, most promissory notes are made secure with a lien or mortgage against the real estate.