What is a Note? What is a Mortgage?

When a person borrows money from a lender in order to buy property there are actually several transactions:

1) The borrower borrows money from a lender. Before the lender gives the borrower the money, the borrower must sign an “I.O.U” which is called the Note. The Note states the terms of the loan, for instance the rate of interest and the number of years which the borrower has to pay back the loan. But more important for the lender – the Note is proof of the loan. For thousands of years across many civilizations, the Note was always needed in order to demand payment. Loss of the Note often meant that the lender could not request that a court enforce payment.

2) What security does the lender have once they give the money to the borrower? The security, known as “collateral”, is the property which is bought with the funds given to the borrower (and sometimes, other properties are pledged also). The borrower pledges that property to the lender. “Mortgage” actually means “pledge”. The borrower pledges to give the lender the property if the borrower can not pay back the loan in full.