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Promissory Note & Mortgage | Real Estate Exam - YouTube
Channel: The Real Estate Classroom
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hey everybody my name is paul vachesky
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and welcome to the real estate classroom
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youtube channel so in today's video
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we're going to discuss
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the promissory note and the mortgage
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in my next video we're going to discuss
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the deed of trust all right
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it just seems like the promissory note
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the mortgage in the deeded trust is very
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difficult for
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students to understand these concepts
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so i want to make sure that i do a good
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job on this video but
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the promissory note in the mortgage is
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where we're going to start
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and i'm going to give you everything
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that you need to know
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in this video
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[Music]
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okay so in this video we're gonna
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discuss uh two legal
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separate distinct instruments called the
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promissory note
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and the mortgage and as i said in my
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opener
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in the next video i'm gonna discuss
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the deed of trust or sometimes called
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the trust
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deed it is a concept all three of these
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these instruments people just seem to
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students just seem to have a hard time
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comprehending how it all works
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but we're going to do our best in this
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video to conceptualize it so the way i
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like to approach this before we actually
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get into anything here is
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to because most of us have purchased
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vehicles
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and most of us have borrowed the money
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from the bank for the for the vehicle
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and so we understand that process and by
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understanding that process
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it helps us to conceptualize this
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process that we're going to discuss
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in the video so think about this when
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you borrowed money from the bank
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to purchase a car the first thing that
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you did
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is qualified so you had to make
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application they did a credit check and
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all of that
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that's the same if you're buying a house
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and then if you were approved eventually
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you had to sign
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all these loan documents well actually
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what you were signing was called a
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promissory note and that promissory note
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did a lot of things and we're going to
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talk about specifically the promissory
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note but you were signing the promissory
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note it said that it's a
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you know a 48-month loan a 60-month loan
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a 72-month loan
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and the loan is the rate the interest
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rate's 4.5 percent
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in in if you know then there's late
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payments if you're late on uh
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or late fees if you're late on the
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payments etc
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however what did the bank also want
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in addition to those loan documents
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called the promissory note that you
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signed what did they insist on having
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and that is the title to the vehicle
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because the title to the vehicle
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is the collateral for that promissory
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note
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so if you stop making your payments
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because the bank is holding on to that
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title to the vehicle that gives them the
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right to repossess
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the vehicle understand this and most
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people don't understand that
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if the bank did not have physical
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possession of that
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title you signed the promissory note
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they gave you the money
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but you failed to deliver that title to
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the bank
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they actually did not have the legal
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authority to repossess the vehicle
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if you stop making your ho your car
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payments it's the same way with the
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promissory note
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in the mortgage so instead of the title
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to the vehicle the bank
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in the case of a home loan wants the
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mortgage and we have to
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understand these two distinct separate
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individual legal
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documents so let's define both of them
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the first one is the promissory note
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the promissory note is a loan document
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whereby the borrower also known as the
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mortgagor
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promises simply to repay a debt over a
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specified period of time
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at a certain interest rate now
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promissory notes can be
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secured or unsecured in the case of
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borrowing money for the vehicle
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and the bank asking for the title to the
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vehicle that's what we called a secured
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note if you got a signature loan where
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you just went down to the bank and
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borrowed
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a couple thousand bucks in fact
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overdraft overdraft accounts for your
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checking account
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is considered an unsecured promissory
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note because there's nothing
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that can the bank can repossess
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in the case of a default of payments
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now a mortgage is an instrument
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it's a legal document that pledges
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or gives the actual real property as
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security or collateral for the loan in
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case the borrower defaults
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it is like the title to the vehicle
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if you will all right that's the
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mortgage is the collateral
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for the promissory note that the
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borrower is going to sign
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all right in today's video we've already
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started but just some key terms key real
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estate terms that we are going to
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hone in on and i've already talked about
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a couple of them already promissory note
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uh mortgage the mortgagor the mortgagee
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we're going to discuss the pledge more
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in detail and then there's a concept
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called
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hypothecation we need to know about
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defeasance clause
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an alienation clause an acceleration
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clause
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assignment of rents and a satisfaction
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piece now
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some of this we've also discussed in
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previous videos as well
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but these are really key terms that we
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have to know when we're discussing
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the promissory note the mortgage and a
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deed of trust
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all right let's start with the
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promissory note first
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understand as we said before a
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promissory note can be secured or
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unsecured
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and it's basically a document that
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provides evidence of a loan
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and it's evidence of a loan between the
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mortgagor who's the borrower and the
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mortgagee who's the lender
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and it's just considered a basic loan
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document now
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there is some important language that's
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typically included
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in this promissory note number one it'll
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it'll typically state the amount that's
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borrowed
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it'll state the interest rate at which
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the bank is loaning you the money
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it'll have a place for the time place
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and the amount
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of the monthly payments to be paid it'll
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discuss whether or not there's a
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prepayment penalty involved or not
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and if there is what are the terms of
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that prepayment penalty
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and then it usually builds in a lot of
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consequences if the borrower defaults
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such as late fees and the lender's right
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to call the note due
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those type of things and then typically
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it will also
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state if it's a secured or unsecured
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promissory note so maybe uh it'll it'll
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identify the collateral like the the
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title to the vehicle
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or the mortgage to the house all right
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that's a promissory note pretty simple
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the next thing i want to talk about is
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the mortgage this is kind of what
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confuses everybody
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and remember the mortgage and the
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promissory note go hand in hand here
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so the mortgage is an additional
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instrument it's a legal instrument
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that actually pledges the property
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as security or collateral for
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the debt that's identified in the
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promissory note all right now
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some states use the mortgage process
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and some states use what we call the
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deed of trust
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there are some distinct differences
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between the two
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for example iowa the state of iowa is a
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mortgage state
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and so if you were in iowa and you were
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buying a house you would
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you would sign the promissory note but
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you would also
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then use a mortgage you would sign a
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mortgage over to the bank
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and that mortgage is like the title to
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the car that is the collateral in case
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you default on the promissory note or
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default on making your payments
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that mortgage then gives the authority
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to the bank to go and foreclose on the
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property
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all right number two the mortgagor who
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is the mortgagor
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that is the borrower understand in
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mortgage states
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the mortgage or the borrower retains
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legal title to the property and the and
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the mortgagee who's the lender simply
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has a lien against the property just
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like your vehicle
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when you buy a vehicle and you hand over
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the title you still own the vehicle
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but the bank has a lien against that
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vehicle in case you default
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now there is a key term you have to know
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it's called hypothecation
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and i have it on your screen here this
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is the legal doctrine and allows the
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borrower to
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pledge that real property as collateral
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but they don't have to give up the legal
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right
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to possess and use it just like a
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vehicle all right just like a vehicle
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now the mortgage is a two-party
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relationship and the two parties
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involved in that relationship
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is the mortgagor in the mortgagee the
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borrower and the lender
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why that's important is because when we
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talk about the deed of trust you're
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going to discover
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that there are three parties involved
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all right
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and then the mortgage is a specific lien
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and it's a
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voluntary lien we discussed those two
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concepts in different
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different videos but it's specific to
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the the lean is specific to the property
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that's being pledged as collateral
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and it's also being voluntarily
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the lien is given voluntarily to the
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lender
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all right so remember the mortgage is a
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document
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that the mortgagor gives to the
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mortgagee
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so it's a it's a document that the
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borrower gives the
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the lender that number one pledges the
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property as
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collateral for the loan or the
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promissory note
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and it's voluntary and it creates the
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lien against the property in case the
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borrower defaults
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the lender can foreclose i know i feel
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like i'm killing a dead horse here but
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i really like to be repetitive here so
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that so as a student you can understand
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i kind of teach this part like
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kindergarten
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number five elements of a mortgage
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meaning what are those
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what's the language that's that's common
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in a mortgage in that instrument called
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the mortgage some of this we've already
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talked about in a previous
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video but we're going to cover it again
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number one it's going to have what's
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called a defeasance clause
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and this defeasance clause says
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that the mortgage remember the mortgage
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is the pledged
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property that places the lien against
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the property it
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it is defeated when the promissory note
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is paid in full
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and the terms of the mortgage have been
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completed so when you pay off
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the loan in accordance with the
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promissory note
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then it basically says the lender then
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has
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no um it defeats the lender's position
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in the property
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it's a legal technical way of saying
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that the lender has no more interest in
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the property
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defeasance clause another clause is
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called the alienation clause or
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sometimes called a do
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on sale clause two key terms i guarantee
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is going to be on your real estate exam
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it just simply says that
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tells the mortgage or the borrower that
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if you sell the property then the first
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debt that is paid is the mortgage okay
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the acceleration clause this permits the
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mortgagee now who's the mortgagee the
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mortgagee is the lender
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to ease and lender to ease in mortgagee
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it permits the the mortgage to call the
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entire sum
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due and payable now upon default of
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payments
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and then the another common clause that
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you're going to see is what's called
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assignments of the rent or assignment of
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rents
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this was really popular or this
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this really came to light in the
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mortgage crisis of 2008 9 10 11.
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where all these investment properties
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the more the
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landlord was going bankrupt and what the
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banks were doing because of the
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assignment of
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rent the banks were going directly to
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the tenants and saying you're going to
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pay your monthly rent directly to
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us not the landlord and what gives them
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the legal authority to do
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that it's the assignment of rent's
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clause
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that's put into the mortgage couple
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other things i need you to know about a
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mortgage number one when that mortgage
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is paid in full
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or that promissory note is paid in full
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and the
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borrower has adhered to the all the
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terms of the
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um the mortgage
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what's the proof that it's been paid off
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so think about the car loan
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so you give the title to the bank
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because that's collateral in case of
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default but when you pay off the
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promissory note when you fulfill the
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terms of the promissory note
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you've made your last payment what
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happens well the bank
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sends you the title back and it'll say
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lien removed
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on the title it removes the lien
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right um that is the evidence that the
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promissory note was paid in full or the
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loan is paid at full
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well with the bank or the lendor i'm
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sorry the lender which is the mortgagee
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what they're going to send you once
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you've completed the terms of that
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promissory note
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they're going to send you what's called
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a satisfaction piece or sometimes called
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a mortgage release and that is the
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evidence
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that you paid this loan off in full
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and then the last thing is we keep
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talking about default what happens
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um if the uh the borrower defaults on
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payments well
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you really need to know that if it's if
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for example you're in the state of iowa
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that's a mortgage
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state then the foreclosure has to be a
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judicial foreclosure uh if
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in our next video and we talk about the
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deed of trust
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in those states that use the d to trust
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that
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is a non-judicial foreclosure
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two terms that you have to know
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basically just means that
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in the state of iowa for example if if
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you have a mortgage and it's foreclosed
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upon
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it has to go to court and actually the
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foreclosure process
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has to play out in in front of a judge
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that's simply what it means so
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all right if you're going to continue
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studying i highly recommend that you
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click
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the deed of trust video to my right here
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because the deed of trust and the more
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in the mortgage and promissory note
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kind of go hand in hand and if you have
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not subscribed to our channel
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yet i would really appreciate you doing
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that click the little circle to my left
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and
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like always if you have a question or
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you'd like to leave a comment put it
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down below in the comments section
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because we love comments and questions
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i'll see you
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in tomorrow's video
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