The Ultimate Guide to Deeds of Trust and Promissory Notes: What’s the Difference?
If you are diving into the world of real estate investing or private lending, you’ve likely encountered two intimidating documents: the Promissory Note and the Deed of Trust.
While they are often mentioned in the same breath, they serve two completely different purposes. Understanding how they work together is the difference between a secure investment and a legal nightmare.
1. What is a Promissory Note? (The “I.O.U.”)
The Promissory Note is essentially the “evidence of the debt.” It is a written promise from the borrower to the lender, outlining exactly how and when the money will be paid back.
Key elements usually include:
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The Principal Amount: The total sum borrowed.
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Interest Rate: Whether it’s fixed or adjustable.
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Repayment Schedule: Monthly installments, “balloon” payments, or interest-only periods.
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Default Terms: What happens if a payment is missed (late fees, acceleration clauses).
Pro Tip: The Promissory Note is a private contract. Unlike the Deed of Trust, it is rarely recorded in public records.
2. What is a Deed of Trust? (The “Collateral”)
If the Promissory Note is the promise to pay, the Deed of Trust is the security for that promise. It links the loan to the physical property.
In a Deed of Trust, three parties are involved:
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The Trustor (Borrower): The person buying the home.
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The Beneficiary (Lender): The entity providing the funds.
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The Trustee: A neutral third party (often a title company) that holds “legal title” until the loan is paid off.
Why it matters: If the borrower stops paying, the Deed of Trust gives the Trustee the power to sell the property (foreclosure) to repay the lender.
3. Key Differences at a Glance
| Feature | Promissory Note | Deed of Trust |
| Purpose | Evidence of the debt | Security for the debt (collateral) |
| Parties | Borrower and Lender | Borrower, Lender, and Trustee |
| Recorded? | No (kept by the lender) | Yes (recorded with the County) |
| What it covers | Interest rates, terms, and dates | Property description and foreclosure rights |
4. Why You Would Want Both
You cannot effectively have one without the other in a secured real estate transaction.
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Without a Promissory Note, the lender has no written proof of the repayment terms.
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Without a Deed of Trust, the lender has no right to seize the property if the borrower defaults. They would just have an “unsecured” loan, which is much harder to collect.
5. FAQs
Is a Deed of Trust the same as a Mortgage?
Not exactly. While they serve the same purpose, a mortgage involves two parties and usually requires a court-supervised (judicial) foreclosure. A Deed of Trust allows for a “Power of Sale,” which is often faster and happens outside of court.
Who holds the original Promissory Note?
The lender holds the original note until the loan is paid in full. Once paid, the lender marks it “Paid in Full” and returns it to the borrower.
Summary: Protecting Your Investment
Whether you are a private lender or a homebuyer, AZ Statewide Paralegal can draft these documents for you. Small errors in the legal description or the interest rate calculations can lead to massive headaches during a sale or foreclosure. Schedule an appointment to get started today by calling 520-327-4000 or 480-745-2552.