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A Promissory Note is an important loan document that is typically executed between a Borrower and Lender when the initial loan proceeds change hands (in the case of a real estate transaction, this would be at the time of closing).
A Promissory Note is a legal agreement between the Borrower and Lender that lays out the specific terms of the loan. It should include all the basic details, such as:
– Loan Amount
– Date of the Loan (including the first payment date)
– Interest Rate
– Payment Amount
– Number & Frequency of Payments
– How the Loan will be Paid (e.g. – principal & interest, installments of interest-only with one lump sum on a specific date, or due on demand)
– How the Note will be secured (e.g. – by a Deed of Trust)
– Whether the Lender can sell or transfer the note to another party
Oftentimes, it makes sense to include an amortization schedule with the note, as a way of making it abundantly clear when each payment is due, the amount of each payment, and what portions of each payment will be applied to principal vs. interest. This can help avoid any confusion between the borrower and lender about what is expected.
Once the document is signed by all the appropriate parties, it can act as a legal document that can be used in court if the lender ever needs to demand what they are owed from a defaulting borrower.
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