Financial aspects of the promissory note

A note documents the terms for repayment of a mortgage or the unpaid portion of the sales price carried back after a down payment, including:

Notes are categorized by the method for repayment of the debt as either:

  • installment notes; or
  • straight notes.

The installment note is used for debt obligations with constant periodic repayments in any amount and frequency negotiated.

Variations of the installment note include:

  • interest-included; and
  • interest-extra.

Alternatively, a straight note calls for the entire amount of its principal to be paid in a single lump sum due at the end of a period of time.

Finally, notes are further distinguished based on interest rate calculations, such as:

  • fixed interest rate notes, commonly called fixed rate mortgages (FRMs); and
  • variable interest rate notes, commonly called adjustable rate mortgages (ARMs).

Relatedly, California usury law limits the interest rate on non-exempt real estate mortgages to the greater of:

  • 10%; or
  • the discount rate charged by the Federal Reserve Bank of San Francisco, plus 5%.

Essentially, usury law is intended to prevent exorbitant interest rates and bad lender behavior.

A non-exempt lender in violation of usury law is required to forfeit all interest on the loan, and is only entitled to a return of the principal advanced.

Keep in mind that the extension of credit by a seller is not considered a loan, and thus seller carryback financing is not subject to usury law.