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:
- the amount of the debt [See RPI Form 420 §1.3];
- the interest rate [See RPI Form 420 §1.5];
- the periodic payment schedule [See RPI Form 420 §2-2.5]; and
- any due date. [See RPI Form 420 §2.3]
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.
