What does the term 'note rate' refer to?

The term 'note rate' specifically refers to the interest rate stated on a mortgage note, which is the document that outlines the terms of the loan. This rate is crucial as it determines the cost of borrowing and the amount of interest the borrower will pay over the life of the loan. It is the rate that is applied to the outstanding principal balance when calculating monthly mortgage payments.

Understanding the note rate is essential for both lenders and borrowers because variations in this rate can significantly affect the total cost of a mortgage over time. Factors such as market conditions, borrower creditworthiness, and loan type can influence the note rate. In contrast, the other terms mentioned do not accurately define the note rate; they relate to different aspects of the loan or its repayment terms. For instance, the principal balance refers to the total amount of money borrowed, while the penalty rate for late payments pertains to fees incurred when payments are not made on time, and the rate charged on cash-out refinances indicates the cost associated with borrowing extra funds against an existing mortgage.