Definition:
The note rate is the interest rate stated in the promissory note of a mortgage. It determines the amount of interest a borrower pays on the loan, separate from other costs like taxes or insurance.
Example:
Mark gets a 30-year mortgage with a note rate of 5.5%. This means 5.5% interest is charged on the amount he borrowed, and it’s used to calculate his monthly principal and interest payments.
Explanation:
The note rate, sometimes called the contract rate, is one of the most important parts of a mortgage. It’s the interest rate used to calculate how much the borrower pays each month toward principal and interest. It is set when the loan is originated and stays fixed for fixed-rate loans or may adjust later for adjustable-rate mortgages (ARMs).
The note rate does not include:
- Taxes
- Homeowners Insurance
- Private mortgage insurance (PMI)
- Other fees
Because of this, the annual percentage rate (APR) is often higher than the note rate—it reflects the true cost of borrowing when those extra charges are included.
Lenders use the note rate to:
- Set monthly mortgage payments
- Determine how much interest is paid over the life of the loan
- Create amortization schedules (payment breakdowns over time)
Even a small change in the note rate can affect how much a buyer qualifies for or how affordable the loan is over time.
Why is Note Rate Important in Real Estate Transactions?
The note rate is important because it directly impacts a borrower’s monthly payment and the total interest paid over the loan term. Understanding the note rate helps buyers compare loan offers and plan their finances wisely. For sellers, buyers with favorable note rates are more likely to close successfully and on time.