The note states how the noteholder will calculate the new interest rate priorto each new change date. It also states how the noteholder will use thenew interest rate to calculate the change to the monthly payment that isnecessary to repay the unpaid portion of the principal by the maturity date.This segment of the note states any limits on the interest rate changes andthe effective date of the changes. The note also states that the noteholderwill deliver or mail notice to the borrower of the change in interest rateprior to the effective date of the change. This notice must include allinformation required by law, including the name and telephone number ofthe individual who can answer the borrower’s questions regarding thenotice. Negotiability of a Promissory Note A note is considered personal property and is a negotiable instrument. Anegotiable instrumentis a written unconditional promise or order to paya certain sum of money on demand or at a definite future date, payableeither to order or to bearer and signed by the maker. Negotiableinstruments are freely transferable and may be transferred by endorsement____________________________________________________________ Unit 5: Financing Real Estate 202
or delivery. Freely transferablemeans a bank or other creditor may sellthe negotiable instrument (promissory note) for cash. The most common type of negotiable instrument is an ordinary bankcheck. A checkis an order to the bank to pay money to the person named.A note is the same thing. It can be transferred by endorsement(signature)just like a check. If correctly prepared, it is considered the same as cash. However, in order to be considered a negotiable instrument, the documentmust be consistent with the statutory definition. Required Elements to Create a Negotiable Promissory Note •Unconditional promise or order to pay a certain amount of money •Payable on demand or at a definite time •Payable to order or bearer •Signed by the maker (borrower) The Uniform Commercial Code(UCC) governs negotiable instrumentsand is designed to give uniformity to commercial transactions across all 50states. As we have seen, notes are negotiable instruments that are easilytransferable from one person to another. However, the new buyer of a note(holder in due course) must be reasonably confident that the loan will bepaid as agreed by the maker. The UCC defines a holder in due courseasone who takes an instrument for value in good faith absent any notice thatit is overdue, has been dishonored, or is subject to any defense against it orclaim to it by any other person. The holder in due course is a subsequent owner of a negotiable instrumentsuch as a note. The holder in due course must have accepted possession ofthe financial instrument in good faith and given something of value for it.The holder in due course is presumed to be unaware that the financialinstrument previously may have been overdue, been dishonored whenpresented for payment, or had a claim against it, if in fact such were thecase. Because the holder in due course is a bona fide purchaser, he orshe is entitled to payment by the maker of the note.