Definition: The contract rate is the interest rate specified in a mortgage agreement between the borrower and the lender. This rate determines the initial monthly payment amount and is fixed or variable depending on the mortgage terms.

Key points about the contract rate

• Fixed or variable: A contract rate can be either fixed (remaining the same throughout the mortgage term) or variable (fluctuating based on changes in the prime rate).
• Monthly payments: The contract rate directly affects the borrower’s monthly mortgage payments. For a fixed-rate mortgage, payments remain consistent, while for a variable-rate mortgage, payments may adjust with interest rate changes.
• Distinct from the posted rate: The contract rate is often lower than a lender’s “posted rate” (advertised rate). Lenders frequently offer discounted contract rates to attract borrowers.

Importance of the contract rate

The contract rate impacts the overall interest costs a borrower will pay over the term. While it can sometimes be renegotiated, especially when renewing or refinancing, this rate typically determines the borrower’s payment obligations and serves as the baseline for any penalties if the mortgage is broken before term-end.

Last modified: November 5, 2024