Deed vs. Note

When you buy real estate and take out a loan, there are three key documents you will either sign or receive: a promissory note, a grant or warranty deed and a trust deed. Notes and deeds are both legal documents, but that's about the only thing they have in common.

A promissory note, usually referred to as a note, is a document that describes the terms of a loan. It's a private document that you sign to promise to pay back your lender. The note contains information like the amount of the loan, the interest rate, the monthly payment, and what happens if you don't pay your loan. Interestingly, your lender doesn't have to sign the note -- it's a one-way agreement that details the promise that you make to the bank.

Deeds are legal documents that transfer property rights such as ownership. The party giving up the rights creates the deed with a description of the property that is being deeded and a description of the rights that are being transferred by the deed. That party signs the deed and gives it to the recipient. Once the recipient has the deed, they have ownership of whatever rights that deed conveys. They can then have the deed placed into the public record -- a process referred to as recording -- to secure the interest.

When you buy a piece of property, the seller will usually give you a grant deed. The grant deed is a relatively simple document that names the property and notes that the seller grants it to you. When you get a grant deed, you're receiving it under the assumption that the seller hasn't already given the property to anyone else, and that he isn't transferring the property with any limitations or encumbrances. A warranty deed is like a grant deed, but contains specific promises, rather than implied ones, that the title's property is clear.

When you get ownership of a property with a grant deed and pay for it with a loan covered by a promissory note, your lender also gets a deed from you. Depending on where you live, you will either give the lender a mortgage, which is technically a deed, or a trust deed. These deeds give your lender a limited right to your property, letting it take the title from you if you don't meet your obligations under the promissory note. Without a trust deed or mortgage, the lender would have to sue you in court to take your house, and might not prevail since many courts won't award ownership of your house to a creditor. The deed you give them to secure your loan puts them in position to foreclose on your house if you don't pay.