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Should I use a promissory note or a mortgage with my parents?

Should I use a promissory note or a mortgage with my parents?

Full question:

I am doing a promissory note with my parents. They want to make sure it is recorded, so I am trying to find the correct form. $325,000 at 4.5% interest for 3 years. Should I use a promissory note then put a lien on the property in case something would happen to me or should i do a mortgage with them instead and register the mortgage by a lien against the property. the mortgage seems to be more costly then just a promissory note. I have the cash to pay them but I just want to leave my cash invested. So what is the better way or the legal way for the state of FL?

Category: Debts and Credit
Subcategory: Promissory Notes
Date: 04/07/2025
State: Florida

Answer:

A promissory note and a mortgage are both forms of loans, but they serve different purposes. A mortgage specifically refers to a loan secured by real estate, while a promissory note can be secured or unsecured. If you secure a promissory note, it means your parents can take possession of the collateral (like the property) if you fail to repay the loan. This can be beneficial in case of bankruptcy, as they could recover the collateral instead of just a portion of your assets.

To create a valid promissory note, both parties must sign it, and a notary should witness the signatures. You can record the note in the county recorder's office where the property is located. The note can specify payment terms, such as installments or a lump sum, and may include a confessed judgment agreement, which allows a judgment to be entered against you without defenses if you default.

A mortgage, on the other hand, creates a lien on the property through a contract. It allows you to pledge real estate as security for the loan. Mortgages often involve additional costs, such as arrangement fees and property valuation fees, but they typically enable you to borrow larger amounts than a standard loan.

In general, if you need a smaller amount and want to keep your cash invested, a promissory note might be suitable. However, if you want a more formal arrangement with a lien on the property, a mortgage could be the better option. Consider consulting with a legal professional to determine the best approach for your specific situation in Florida.

This content is for informational purposes only and is not legal advice. Legal statutes mentioned reflect the law at the time the content was written and may no longer be current. Always verify the latest version of the law before relying on it.

FAQs

How to record interest on promissory note?

To record interest on a promissory note, you should include the interest rate and payment schedule in the note itself. When payments are made, keep accurate records of each transaction, noting the principal and interest portions. If the note is secured, you can also record it with the county recorder's office to establish a public record. This helps in tracking the loan's status and ensures that both parties are aware of the interest accrued. Consult a legal professional for specific requirements in Florida.

What are the cons of a promissory note?

Some cons of a promissory note include the potential for limited legal recourse if the borrower defaults, especially if it's unsecured. Additionally, if not properly documented or recorded, it may be difficult to enforce the terms. There may also be tax implications for the lender, as interest income must be reported. It's essential to clearly outline terms and conditions to avoid misunderstandings. Consulting with a legal professional can help mitigate these issues.

Do you have to pay taxes on a promissory note?

Yes, the interest earned on a promissory note is generally considered taxable income for the lender. The borrower does not pay taxes on the amount borrowed, but they should keep records of interest payments. If the note is forgiven or settled for less than the amount owed, there may be tax implications for the borrower as well. It's advisable to consult a tax professional for personalized guidance based on your situation.

What happens when a promissory note is paid?

When a promissory note is paid in full, the lender should provide a receipt or a satisfaction of the note, confirming that the debt has been settled. It’s important to document this transaction to avoid future disputes. If the note was secured by collateral, the lender should release any claims on the collateral. This ensures that both parties have clear records of the transaction. Always consult with a legal professional to ensure proper procedures are followed.

How to calculate a promissory note?

To calculate a promissory note, determine the principal amount, interest rate, and term of the loan. Use the formula for calculating interest: Interest = Principal x Rate x Time. For monthly payments, you can use an amortization formula or calculator to determine the payment amount, which includes both principal and interest. This helps in understanding the total cost of the loan over its term. For complex calculations, consider consulting a financial advisor.