What term describes the actual interest rate specified in a mortgage or loan agreement?

The term that describes the actual interest rate specified in a mortgage or loan agreement is known as the Note Rate. This is the rate that is explicitly stated in the promissory note and represents the borrowing cost for the borrower over the life of the loan. The Note Rate is critical because it directly affects the monthly payment amount that the borrower will need to repay.

In contrast, the other terms refer to different concepts related to the cost of borrowing. For instance, the Effective Rate often takes into account the impact of fees and compounding over the term, providing a better indication of the true cost of borrowing than the stated rate alone. The Market Rate generally refers to the prevailing interest rates in the economy at a given time, influenced by supply and demand dynamics, whereas the APR (Annual Percentage Rate) encompasses not just the interest rate but also includes any other costs associated with obtaining the loan, expressed on an annual basis.

This distinction is significant because while the Note Rate is what the borrower agrees to pay, the APR provides a broader view of the overall cost of the loan, including additional fees that may apply. Thus, it’s essential for borrowers to understand both the Note Rate and APR to make informed decisions about their financing options.