Glossary term
Note Rate
A note rate is the interest rate stated in a mortgage note or other loan agreement and used to calculate interest on the debt.
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What Is a Note Rate?
A note rate is the interest rate stated in a mortgage note or other loan agreement. It is the contractual rate used to calculate interest on the unpaid principal balance, subject to the loan's terms.
In mortgage lending, the note rate is often the rate borrowers focus on first, but it is not the same as the annual percentage rate, or APR. The note rate drives the principal-and-interest payment. APR is a broader disclosure measure that includes certain financing costs and is used to compare loan offers.
Key Takeaways
- The note rate is the contractual interest rate on the loan note.
- It is used to calculate the regular interest portion of the payment.
- It differs from APR, which reflects certain costs of credit.
- Temporary buydowns may reduce early payments without changing the note rate.
- For many loans, qualification and payment testing are tied to the note rate or a required qualifying rate.
Where the Note Rate Shows Up
The note rate appears in the promissory note and is also reflected in mortgage disclosures such as the Loan Estimate and Closing Disclosure. For a fixed-rate mortgage, the note rate generally stays the same for the life of the loan. For an adjustable-rate mortgage, the note explains how the rate can change after the initial period.
Borrowers should read the note rate alongside payment, points, lender credits, APR, mortgage insurance, taxes, insurance, and closing costs. A lower note rate may come with higher upfront cost, while a higher note rate may come with lender credits that reduce cash needed at closing.
Note Rate Compared With Related Terms
Term | What it tells you |
|---|---|
Note rate | The contractual interest rate used to calculate loan interest. |
APR | A standardized cost-of-credit measure that includes certain fees. |
Payment rate | The rate used to calculate a payment, which may be temporarily reduced by a buydown. |
Qualifying rate | The rate a lender uses to test borrower affordability. |
Mortgage Pricing Context
The note rate is only one part of loan pricing. Two mortgage offers with the same note rate can have different closing costs. Two offers with different note rates can have similar total cost depending on points and credits. That is why comparing only the note rate can lead to a poor read of the deal.
Temporary buydowns create another distinction. A borrower may make lower payments in the early years, but the note rate is still the full contractual rate. When the subsidy ends, the payment moves to the note-rate payment unless the loan terms provide another change.
The Bottom Line
The note rate is the interest rate written into the loan contract. It is central to the payment, but it should be evaluated with APR, closing costs, buydowns, credits, and how long the borrower expects to keep the loan.