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Promissory Note Spells Out How Much You Owe and When You Must Pay

By Benny L. Kass
Saturday, February 12, 2005; Page F03

Last in a series of articles

One of the most important papers you will be asked to sign when you close on a mortgage, whether to buy a house or refinance a loan, is a promissory note. It is your promise to pay back to your lender the money you are borrowing, your IOU.

The terms under which you borrow money differ -- fixed or adjustable mortgage rates, 15-year or 30-year terms, and so on. The lender wants to make sure that all the terms and conditions of your loan are spelled out in a single document. The lender also wants to make sure that there will be no confusion about these terms and conditions, so that in the future you cannot claim that you did not know what your obligations were.

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No matter what type of loan you obtain, you will have to sign a number of legal documents at the closing, including the HUD-1 settlement statement, a deed of trust (discussed last week in this column) and a promissory note.

Read the note carefully. Unlike the deed of trust, which can be 15 or more pages, the note is generally short. But do not be misled by its brevity; it can give you a knockout punch if you do not make your payments on time.

There are some important sections in every promissory note:

• Are your name and address correct?

• Is the interest rate what you were promised by your lender? You should also analyze the Truth in Lending statement that by law must be given to you at settlement, but the annual percentage rate contained in that statement is not the same as your mortgage interest rate, which must be spelled out in the note. The annual percentage rate represents the true yield to the lender, computed on all of the fees and costs you pay at settlement.

• Is the amount of your monthly payment correct? Some lenders will escrow money for real estate taxes and insurance, so the amount you pay each month will be higher than that spelled out in the note. Make sure you know what your payment will be before you leave the settlement table.

• When is your first payment due? Typically, interest is paid in arrears, so when you make your March payment, for example, it is paying the interest that accrued in February. If you were to settle on Feb. 14, your lender would collect at settlement the interest through the end of the month, 15 days, but your first monthly payment would not be until April 1.

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