Note Rate
Definition and meaning of Note Rate in real estate.
A note rate is the specific interest rate stated in the mortgage note, which is the legal contract detailing the terms of a home loan. This rate determines the interest the borrower will pay and serves as the basis for calculating the monthly mortgage payment.
In more detail
The note rate is established at the time of the loan closing and remains fixed or adjusts depending on whether the loan is a fixed-rate or adjustable-rate mortgage. Unlike the annual percentage rate, which includes additional loan fees and closing costs, the note rate reflects only the cost of borrowing the principal amount.
Borrowers can sometimes lower their note rate during the underwriting process, which is the lender's evaluation of the borrower's risk, by purchasing discount points, which are upfront fees paid to the lender. Knowing this rate helps borrowers understand exactly how much of their monthly payment goes toward interest versus principal.
Key facts
| Category | Mortgages & Financing |
|---|---|
| Also known as | Nominal interest rate, face interest rate |
| Watch out for | Does not include annual percentage rate fees |
| Determined by | Lender underwriting and credit score |
A homebuyer signs a mortgage agreement for a home loan with a note rate of six percent, meaning their monthly interest charges will be calculated using that specific percentage.
Frequently asked questions
How does the note rate differ from the annual percentage rate (APR)?
The note rate is the actual interest rate used to calculate your monthly payment, while the APR is a broader measure that includes the note rate plus other lender fees, broker fees, and closing costs expressed as a yearly rate.
Can a note rate change after you close on a home?
If you have a fixed-rate mortgage, the note rate will never change. If you have an adjustable-rate mortgage, the note rate can fluctuate up or down at scheduled intervals based on market index movements.