The note rate, sometimes called the promissory note rate, is the explicit interest rate written into your loan agreement, such as a mortgage or auto loan. It represents the annual percentage the lender charges on the outstanding loan balance. This rate largely determines your monthly principal and interest payments.
Note rates can be fixed or adjustable. Fixed note rates stay the same throughout the loan’s life, providing payment stability. Adjustable note rates (as with Adjustable-Rate Mortgages or ARMs) can change periodically after an initial fixed period, based on financial indices like SOFR, causing fluctuating monthly payments.
Several factors influence your note rate, including your credit score (higher scores usually get lower rates), current market interest rates influenced by the Federal Reserve, loan type and term, down payment size, and your debt-to-income ratio.
It’s important to distinguish note rate from Annual Percentage Rate (APR). The note rate covers only the interest charged on the loan principal. The APR includes the note rate plus most upfront fees and mortgage insurance, providing a fuller picture of total borrowing costs. Comparing APRs is essential when choosing loans because it shows the true expense over time. For more on APR, see our APR (Annual Percentage Rate) article.
For example, a 30-year $300,000 mortgage at a 6.0% note rate may have monthly principal and interest payments around $1,798, while a 6.5% rate increases payments to about $1,900, significantly affecting total interest paid over the loan period.
To secure a lower note rate, maintain a strong credit score, shop multiple lenders, increase your down payment, consider shorter loan terms, reduce existing debts, and understand discount points that can buy down your rate.
Remember, the note rate is not the total cost of your loan. Always ask lenders for the APR to understand the comprehensive cost. For further details on loan documentation, see Mortgage Note and Master Promissory Note glossaries.
According to the Consumer Financial Protection Bureau, comparing APRs helps consumers make informed decisions by revealing hidden fees and comprehensive loan costs. For the latest on how interest rates are influenced, see the Federal Reserve’s updates at Federal Reserve.
